Understanding the federal earned income tax credit

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.

The federal earned income tax credit should help people who may need a tax break most: lower-income workers. But 1 in 5 people who are eligible for the credit don’t claim it, the IRS says.

Qualifying for and claiming the EITC could net you a bigger refund — or give you a refund even if you didn’t overpay your federal taxes for the year. But the only way to claim the credit is to file a federal income tax return — even if you wouldn’t be required to file otherwise.

Let’s look at how the federal credit works, who can be eligible for it and how much it may be worth.

• What is the earned income tax credit?
• How much is the EITC worth?
• Who qualifies for the earned income tax credit?
• What counts as earned income for the EITC?
• How can I claim the earned income tax credit?

What is the earned income tax credit?

The earned income tax credit, or EITC, started out in 1975 as a plan to encourage the working poor to keep working and stay off welfare. Today, the EITC is one of the federal government’s largest anti-poverty programs.

Like all credits, the EITC is a dollar-for-dollar reduction in the amount of tax you owe. It’s also refundable, which means if you owe no tax, or the credit amount is more than your tax liability, you can get the remaining credit as a tax refund.

Image: eitc-refundable

Take note if you’re someone who tends to file early: Federal law says the IRS can’t issue refunds to filers who claim the EITC before mid-February.

How much is the EITC worth?

If you’re eligible to claim the earned income tax credit, its worth will depend on your filing status, the number of children you claim (if any) and your qualifying earned income.

The IRS generally provides worksheets and tables in the Form 1040 instructions to help qualifying filers determine the amount of the credit they can claim.

Here are the maximum EITC credit amounts for 2020.

Who qualifies for the earned income tax credit?

The IRS offers an EITC Assistant to help you determine if you may qualify for the credit. To qualify, you must meet some basic requirements, including …

• You, your spouse (if filing jointly) and any qualifying children you claim must all have valid Social Security numbers.
• You (or your spouse if you’re married filing jointly) must work and have earned income.
• You must meet adjusted gross income limits.
• You have no more than $3,650 in income from investments.
• You generally can’t be claimed as a dependent (or a qualifying child) on someone else’s federal return.
• Married couples can’t qualify if they use the married filing separately status on their federal returns.

What counts as earned income for the EITC?

The federal earned income tax credit is meant to be a tax break for low- and moderate-income workers, so you’ll need to have income earned from working in order to qualify. The IRS says you can get earned income in two ways: by working for someone who pays you or by owning or running a business or farm.

These are the types of income that determine EITC eligibility.

• Wages, salaries, tips and other types of taxable pay you earn from working as an employee
• Net earnings from any kind of self-employment (earnings before you take business tax deductions)
• Money earned as an independent contractor if you’re considered a statutory employee (but even independent contractors who are not statutory employees may qualify)

It’s also important to understand what the IRS won’t count as earned income toward EITC eligibility. Here are some types of income that don’t count.

• Alimony and child support
• Interest and dividends (investment income)
• Nontaxable payments you receive for fostering a child
• Pensions and annuities
• Social security and railroad retirement benefits (including disability benefits)
• Unemployment benefits (even though they’re generally taxable income)
• Veterans benefits (including VA rehabilitation payments)
• Welfare benefits
• Workers’ compensation benefits

Here are the adjusted gross income limits for EITC eligibility.

Kids and EITC eligibility

If you’re at least 25 but younger than 65, and you meet income limits, you don’t have to be a parent to qualify for the earned income credit. But if you do have children and you want to claim them in order to get a higher credit amount, they’ll have to meet relationship, age, residency and joint return tests in order to qualify.

How can I claim the earned income tax credit?

If you meet all the requirements to get the EITC, you’ll need to file a federal income tax return to claim it. Filers who are also claiming qualifying children must complete and file Schedule EIC with their 1040.

Verifying eligibility and completing all the necessary forms can seem intimidating, so you might be looking into having a paid preparer file your federal tax return for you. But if your income is low enough, you may qualify to use Free File. Or you may be able to qualify for free help from the IRS Volunteer Income Tax Assistance (or VITA) and Tax Counseling for the Elderly programs.

Next steps

If you think you might qualify for the EITC, the IRS EITC Assistant can help you get a better idea of your eligibility.

Keep in mind that eligibility can change with a change in your parental, financial or marital status (marriage or divorce). You may qualify for the current tax year even if you didn’t qualify in prior years.

What’s more, qualifying for the federal earned income tax credit could mean you qualify for other credits, such as a federal child tax credit or state credits for low-income workers. The National Conference of State Legislatures provides information about state EITCs on its website.

Relevant sources: IRS: Earned Income Tax Credit (EITC) | IRS: Earned Income Tax Credit and Other Refundable Credits | IRS: Know the Questions to Ask about Refundable Credits | IRS: Statistics for Tax Returns with EITC | IRS: EITC Fast Facts | IRS: EITC Key Communication Messages | IRS: EITC Reports and Statistics | IRS Publication 596, Earned Income Credit (2019) | IRS Earned Income Tax Credit Income Limits and Maximum Credit Amounts | IRS: How Do I Claim EITC? | Schedule EIC (2019) | IRS Form 1040 Instructions (2019) | IRS: Statutory Employees | Congressional Research Service: The Earned Income Tax Credit (EITC): A Brief Legislative History

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent, the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.