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Created in 1975 as a way to offset Social Security taxes and provide an incentive for taxpayers to work, the Earned Income Tax Credit provides tax relief for people who work, but do not earn high incomes. Taxpayers who qualify and claim the credit can pay fewer taxes and may even qualify for a tax refund. As a result, the IRS considers the Earned Income Tax Credit one of the largest antipoverty programs in the country.
What Is Earned Income?
Earned income includes taxable income and wages that come from having a job. This includes wages earned working for someone else or from being self-employed.
Income sources such as Social Security, stock dividends or child support are not considered earned income by the IRS.
Who Can Qualify?
There are 20 separate criteria that must be met to qualify for the credit with income and family size being the key qualifiers.
To qualify for the credit, the taxpayer must meet these basic requirements:
- Have a valid Social Security number
- Not file as "married filing separate"
- Not file Form 2555 or Form 2555-EZ (related to Foreign Earned Income)
- Meet the investment income limitation (less than $3,150 for tax year 2011)
- Have earned income
- Not be the qualifying child of another person
- Generally, be a U.S. citizen or resident alien for the entire year
Income maximum amounts and the size of the Earned Income Tax Credit are adjusted each year for inflation. For the 2011 tax year, these are the income guidelines to qualify:
- $43,998 ($49,078 married filing jointly) with three or more qualifying children
- $40,964 ($46,044 married filing jointly) with two qualifying children
- $36,052 ($41,132 married filing jointly) with one qualifying child
- $13,660 ($18,740 married filing jointly) with no qualifying children
The tax credit table found in IRS Publication 596 explains the varying amounts of the Earned Income Tax Credit. The exact size of the credit will depend on your filing status and the number of your qualifying children.
The IRS recognizes that the qualifying process is complicated and offers an interactive online tool called the EITC Assistant to walk taxpayers through the steps to determine eligibility. The tool is available in both English and Spanish.
What Is A Qualifying Child?
A child must have
a Social Security Number and pass relationship, age, residency and return status tests be considered a qualifying child for the purposes of the Earned Income Tax Credit.
A qualifying child cannot be claimed by more than one person for the Earned Income Tax Credit and other federal tax benefits. The IRS has a system of guidelines for deciding which parent will claim the child if the parents don't agree.
It's Not Just For Families With Children
Low income individuals don't need to have children to qualify for the Earned Income Tax Credit. This is important because the IRS believes that a large number of childless workers are eligible for the credit but never apply. Childless workers who believe that they might be eligible should use the EITC Assistant.
How To Claim The Credit
The paperwork for the Earned Income Tax Credit must be submitted each year with the taxpayer's federal tax return. IRS Publication 596 details the eligibility requirements and explains the schedules that may need to be attached to the return to support the eligibility claim.
Taxpayers can indicate Earned Income Tax Credit eligibility on the 1040, 1040A or 1040EZ forms. IRS agents prefer the taxpayer to have already gone through the EITC Assistant process to absolutely guarantee eligibility.
Because returns involving the Earned Income Tax Credit can be complicated, the IRS suggests engaging the help of a paid preparer, the agency's Free File system or using tax assistance volunteers. Most taxpayers who qualify for the Earned Income Tax Credit also qualify to use Free File, which is tax software available through the IRS website. The IRS also has a phone number on its website to link taxpayers to free tax help.
Last year 26 million people received more than $59 billion in Earned Income Tax Credits. Furthermore, the IRS affirms that the Earned Income Tax Credit has helped to lift 6 million people above the poverty line. However, the IRS believes that about one-fifth of those who are eligible for the credit don't claim it. This is most likely because they don’t know about it or don’t believe they will qualify. Make sure that you do not miss out on this tax relief by taking the time to use the IRS’s interactive online tool to see if you qualify. Doing your homework will pay off when tax season rolls around.
Last Updated: January 28, 2012