Earned Income Credit

The earned income tax credit (aka EITC, earned income credit, EIC) (IRC §32), enacted in 1975, is a refundable tax credit to lighten the burden of the regressive payroll taxes, which consists of the Social Security tax and the Medicare tax, on the poor. Hence, the credit is only available to those with earned income that is subject to employment taxes. So, for instance, if you received only unemployment income for the year, you will not qualify for the EITC. The base amount of the credit depends on the number of qualifying children for which the taxpayer can claim as dependents, and on the taxpayer's income.

The American Rescue Plan Act (ARPA)

The American Rescue Plan Act (ARPA) changes EITC for taxpayers without children and for MFS filers, raises the investment income limit, and the lookback rule. Except where noted, all changes apply to the 2021 tax year only.

To claim the credit, investment income cannot exceed a limit that is adjusted annually for inflation.

Qualifying
Children
Maximum
EITC
Maximum AGI
(Married Filing Jointly)

2022: Investment Income ≤ $10,300

Source: Rev. Proc. 2021-45

0 $560 $16,480 ($22,610)
1 $3,733 $43,492 ($49,622)
2 $6,164 $49,399 ($55,529)
3 or more $6,935 $53,057 ($59,187)

The American Rescue Plan Act (ARPA),
signed into law on March 11, 2021,
has significantly improved
this credit for low-income taxpayers.

2021: Investment Income ≤ $10,000

Source: Rev. Proc. 2021-23

0 $543 $15,980 ($21,920)
1 $3,618 $42,158 ($48,108)
2 $5,980 $47,915 ($53,865)
3 or more $6,728 $51,464 ($57,414)

2020: Investment Income ≤ $3,650

Source: Rev. Proc. 2019-44

0 $538 $15,820 ($21,710)
1 $3,584 $41,756 ($47,646)
2 $5,920 $47,440 ($53,330)
3 or more $6,660 $50,954 ($56,844)
Source: EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

The earned income credit is sometimes considered a negative income tax, because, being a refundable tax credit, it is paid to people even if they do not have a tax liability.

In previous years, many taxpayers took the EITC as an advance payment of earned income credit by reducing the tax taken out of their wages. However, this provision, which had been available for many years, was eliminated by the Education Jobs and Medicaid Assistance Act of 2010. IRC §3507, which authorized advanced payments, has been repealed. Hence, after 2010, the earned income credit can only be claimed with the tax return.

Some states also have an EITC. Vermont, for instance, has one of the most generous earned income credits. The average EITC recipient received about 25% of their total EITC from Vermont. States may also have different requirements. Vermont, for instance, requires a taxpayer to have at least 1 child, be between ages 25 and 65, receive income from work, and live in a low-income household. So, a low-income wage earner who lives in a middle-class family would not qualify.

The primary advantage of the EITC is that it is the best tax break for reducing poverty. While many politicians espouse a higher minimum wage to combat poverty, thereby making labor more expensive and employers more inclined to use automation to reduce labor costs, the EITC is only paid to poor families, at no cost to employers.

Eligibility

The earned income credit is available to single and married people or a head of household with children. Taxpayers without children may claim the credit if they are older than 24 and younger than 65 and no one else can claim them as a dependent. However, the earned income credit is larger for people with children and the phaseout limit is much higher. However, if the taxpayer has children, then they must claim a filing status as head of household, married filing jointly, or as a qualified widow(er) to claim the EITC.

Married persons filing separately may not claim the EITC. However, if a spouse lived apart from the other spouse for the last half of the tax year, then she may be able to claim the credit as head of household. Nonresident aliens cannot claim the credit, unless they are married and an election is made by the couple to subject their worldwide income to United States tax.

The amount of the earned income credit that can be claimed by the taxpayer depends on income and the number of qualifying children. For head of household and filing married jointly, a qualifying child must satisfy these tests:

A child who is married by the end of the tax year, and who files a joint return, cannot be claimed as a qualifying child, unless the return is filed only to claim a refund.

The rules differ slightly for qualified widow(ers). The qualifying widow(er) status differs from the head-of-household status by not counting foster children as qualified dependents under this provision and by requiring that the child must have lived with the taxpayer for the entire year instead of just more than ½ year required for head-of-household status.

Tie-Breaking Rules

If more than 1 taxpayer can potentially claim a certain child, then tie-breaking rules apply:

Earned Income, Disqualifying Income

The amount of the credit is limited by earned income, which includes:

Earned income does not include interest, dividends, alimony, welfare benefits, veterans' benefits, pensions and annuities, workers compensation, unemployment compensation, nontaxable employee compensation, excludable dependent care benefits, or excludable education assistance.

The earned income credit is not available if disqualifying income exceeds the investment income limit (listed in the table at the top of this page), which is adjusted for inflation annually. Disqualifying income includes:

Presumably, a taxpayer with large amounts of unearned income does not need the EITC. The EITC cannot be claimed by a taxpayer who claims the foreign income exclusion, regardless of the amount.

How the Earned Income Credit Is Calculated

The earned income credit calculation is rather complicated, based on both earned income, the income earned from work, and adjusted gross income (AGI), but most people can simply consult the EITC tax table in IRS Publication 596, Earned Income Tax Credit. If the taxpayer has qualifying children, then Schedule EITC should be filed with Form 1040, listing the qualifying children and their Social Security numbers. To calculate the EITC, taxpayers are classified into groups based on filing status and the number of qualifying children: 0, 1, 2, 3 or more.

The EITC calculation is based on the following numbers, stipulated by IRC §32, some of which are adjusted for inflation:

Qualifying
Children
Credit
%
Phaseout
%
0 7.65% 7.65%
1 34% 15.98%
2 40% 21.06%
3 or more 45% 21.06%

To summarize:

Annotated sample of the earned income tax credit worksheet showing how the credit depends on both earned income, the income earned from work, and adjusted gross income, whichever yields the lowest credit.
Sample EIC Worksheet showing how the EITC depends on both earned income, the income earned from work, and adjusted gross income. The credit depends on the income that yields the lowest credit.

This is how the earned income credit is calculated according to the EIC worksheet found in IRS Publication 596, Earned Income Tax Credit.

  1. Enter your earned income, the income earned from work.
  2. Look up the EITC from the table for that amount.
  3. Enter your adjusted gross income (AGI) from Form 1040.
  4. If AGI exceeds your earned income by a certain amount (2020: $8800 for no qualifying children, $19,350 for 1 or more qualifying children, or $25,250 if married filing jointly), then look up the credit for your AGI.
  5. Your credit = the lower of the credit based on your earned income or the credit based on your AGI.
Diagram showing how the earned income tax credit (EITC) varies with taxpayer income.

As can be seen in the above graph, the maximum credit allowable phases out at much lower adjusted gross income (AGI) levels.

EITC Related Penalties

The IRS assesses penalties against taxpayers who fraudulently claim the EITC or flagrantly violates the rules. If the IRS sends a deficiency letter denying the EITC for a taxpayer, then the credit cannot be claimed in future years unless she files Form 8862. The taxpayer can claim the credit if the IRS re-certifies eligibility, in which case, Form 8862 does not have to be filed again unless the IRS denies the EITC again.

Future credits for a taxpayer are denied for 2 years if the taxpayer disregarded the rules in claiming the EITC. Fraud increases the period to 10 years.

Longer Delays for Refunds for Taxpayers Claiming the Earned Income Tax Credit or the Additional Child Tax Credit

Starting in 2017, there will be a longer wait for refunds for people claiming the Additional Child Tax Credit and the Earned Income Tax Credit. The EITC is fully refundable, meaning that the taxpayer will receive a refund even if no taxes were paid. The ACTC is refundable, but only to the extent of paid taxes, including employment taxes. Because the regular child tax credit can only offset ordinary tax liability, most poor people mainly benefit from the ACTC. Most other tax credits cannot be used to lower employment tax liability. Other refundable tax credits, such as the Premium Tax Credit for healthcare coverage, are not subject to the delay. However, the whole refund will be delayed, not just the portion attributable to the EITC and the ACTC.

The IRS is required to delay the refunds until at least February 15 so that it has the chance to verify the claimed credits, because, previously, many refunds were paid erroneously because of errors in claiming the refund or from fraud. Therefore, there will be some delay regardless of when the tax return is filed, so taxpayers who want their money sooner should file as soon as possible. Because of the Presidents’ Day holiday, the refunds may be delayed even for early filers until the end of February.

This delay was enacted as a provision under the Protecting Americans from Tax Hikes Act of 2015, often known by its much briefer moniker, the Path Act.

Tax preparers may offer the tax refund sooner, but they are really offering a loan, since the delay is required by law. These loans often have unfavorable terms, so they should be avoided.

The estimated time for refunds can be checked after February 15 using the IRS2Go mobile app, or by checking the Where's My Refund? - It's Quick, Easy and Secure page at irs.gov.

Source: Refund Timing for Earned Income Tax Credit and Additional Child Tax Credit Filers

Historical Notes

Qualifying
Children
Maximum
EITC
Maximum AGI
(Married Filing Jointly)

The American Rescue Plan Act (ARPA),
signed into law on March 11, 2021,
has significantly improved
this credit for low-income taxpayers.

2021: Investment Income ≤ $10,000

Source: Rev. Proc. 2021-23

0 $543 $15,980 ($21,920)
1 $3,618 $42,158 ($48,108)
2 $5,980 $47,915 ($53,865)
3 or more $6,728 $51,464 ($57,414)

2020: Investment Income ≤ $3,650

Source: Rev. Proc. 2019-44

0 $538 $15,820 ($21,710)
1 $3,584 $41,756 ($47,646)
2 $5,920 $47,440 ($53,330)
3 or more $6,660 $50,954 ($56,844)

2019: Investment Income ≤ $3,600

Source: Rev. Proc. 2018-57

0 $529 $15,570 ($21,370)
1 $3,526 $41,094 ($46,884)
2 $5,828 $46,703 ($52,493)
3 or more $6,557 $50,162 ($55,952)

2018: Investment Income ≤ $3,500

Source: Rev. Proc. 2017-58

0 $520 $15,310 ($21,000)
1 $3,468 $40,402 ($46,102)
2 $5,728 $45,898 ($51,598)
3 or more $6,444 $49,298 ($54,998)
Source: EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
Qualifying
Children
Maximum
EITC
Maximum AGI
(Married Filing Jointly)

2017: Investment Income ≤ $3,450

Source: Rev. Proc. 2016-55

0 $510 $15,010 ($13,930)
1 $3,400 $39,617 ($45,207)
2 $5,616 $45,007 ($50,597)
3 or more $6,318 $48,340 ($53,930)
2016: Investment Income ≤ $3,400
0 $506 $14,880 ($20,430)
1 $3,373 $39,296 ($44,846)
2 $5,572 $44,648 ($50,198)
3 or more $6,269 $47,955 ($53,505)
2015: Investment Income ≤ $3,400
0 $503 $14,820 ($20,330)
1 $3,359 $38,511 ($44,651)
2 $5,548 $43,756 ($49,974)
3 or more $6,242 $46,997 ($53,267)
2014: Investment Income ≤ $3,350
0 $496 $14,590 ($20,020)
1 $3,305 $38,511 ($43,941)
2 $5,460 $43,756 ($49,186)
3 or more $6,143 $46,997 ($52,427)
2013: Investment Income ≤ $3,300
0 $487 $14,340 ($19,680)
1 $3,250 $37,870 ($43,210)
2 $5,372 $43,038 ($48,378)
3 or more $6,044 $46,227 ($51,567)
2012: Investment Income ≤ $3,200
0 $475 $13,980 ($19,190)
1 $3,169 $36,920 ($42,130)
2 $5,236 $41,952 ($47,162)
3 or more $5,891 $45,060 ($50,270)
2011: Investment Income ≤ $3,150
0 $464 $13,660 ($18,740)
1 $3,094 $36,052 ($41,132)
2 $5,112 $40,964 ($46,044)
3 or more $5,751 $43,998 ($49,078)
Source: EITC Income Limits, Maximum Credit Amounts and Tax Law Updates