Earned Income Credit
The earned income credit (aka EIC, earned income tax credit, EITC ) (IRC §32), enacted in 1975, is a refundable tax credit to lighten the burden of the regressive payroll taxes, consisting 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 EIC. The base amount of the credit depends on the number of qualifying children for whom the taxpayer can claim as dependents and on the taxpayer's income.
To claim the credit, investment income cannot exceed a limit that is adjusted annually for inflation.
Qualifying Children | Maximum EIC | Maximum AGI (Married Filing Jointly) |
---|---|---|
2025: Investment Income ≤ $11,950 Source: Rev. Proc. 2024-40 | ||
0 | $649 | $19,104 ($26,214) |
1 | $4,328 | $50,434 ($57,554) |
2 | $7,152 | $57,310 ($64,340) |
3 or more | $8,046 | $61,555 ($68,675) |
2024: Investment Income ≤ $11,600 Source: Rev. Proc. 2023-48 | ||
0 | $632 | $18,591 ($25,511) |
1 | $4,213 | $49,084 ($56,004) |
2 | $6,960 | $55,768 ($62,688) |
3 or more | $7,830 | $59,899 ($66,819) |
2023: Investment Income ≤ $11,000 Source: Rev. Proc. 2022-38 | ||
0 | $600 | $17,640 ($24,210) |
1 | $3,995 | $46,560 ($53,120) |
2 | $6,604 | $52,918 ($59,478) |
3 or more | $7,430 | $56,838 ($63,398) |
Source: EIC 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 took the EIC 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 IRC §3507, which authorized advanced payments, has been repealed.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 EIC. Vermont, for instance, has 1 of the most generous earned income credits. The average EIC recipient received about 25% of their total EIC 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 EIC 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 EIC 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. Those 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, a taxpayer with children must claim a filing status as head of household, married filing jointly, or as a qualified widow(er) to claim the EIC. If the children are not qualified only because they do not have valid Social Security numbers, the taxpayer can claim the EIC without children if she would otherwise qualify.
Married persons filing separately may not claim the EIC. However, the American Rescue Plan Act (ARPA) of 2021 allows a married taxpayer who files Married Filing Separately to claim the EIC as head of household even though her filing status is married filing separately if:
- the taxpayer lived with a qualifying child for more than 1/2 year, and
- the taxpayer either
- did not live with their spouse during the last 6 months of the year, or
- they are legally separated or under a decree of separate maintenance under state law and did live with their spouse at year-end.
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 earned income credit that can be claimed depends on income and the number of qualifying children. For head of household and filing married jointly, a qualifying child must satisfy these tests:
- Relationship test: descendants of the taxpayer, stepson, stepdaughter, brother or sister, stepbrother or stepsister, half-brother or half-sister, or any of their descendents, an eligible foster child, or legally adopted child.
- Residency test: Taxpayer's principal place of residency must be located within the United States and the qualifying child must have lived with the taxpayer for more than 1/2 of the taxpayer's tax year. However, temporary absences are disregarded, such as for school, vacation, medical care, or detention in a juvenile facility.
- Age test: The child must be less than 19 years old at the end of the tax year, or 24, if the child is a full-time student. There is no age test for a child who is permanently and totally disabled at any time during the year. A person is considered permanently and totally disabled if he cannot engage in any substantial gainful activity because of the disability and a physician certifies that the condition is expected to last for at least a year or lead to death.
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 qualifying surviving spouse (QSS). The qualifying surviving spouse (QSS) 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 1/2 year required for head-of-household status.
Taxpayers ineligible for the EIC because their children do not have Social Security numbers valid for employment may claim the childless EIC.
You must identify your children on Schedule EIC, Earned Income Credit, Qualifying Child Information. This form will also walk you through the steps for determining if your children are qualified for the earned income credit.
Tie-Breaking Rules
If more than 1 taxpayer can potentially claim a certain child, then tie-breaking rules apply:
- If parents are living apart and filing separately, then:
- The parent with whom the child resided for the longest period during the tax year can claim the EIC.
- If there is no difference between the time periods, then the parent with the highest AGI has priority.
- A parent has priority over nonparents.
- When none of the potential claimants are the child's parent, then the person who had the highest AGI for the tax year has priority.
If you cannot claim the child because of the tie-breaking rules, then you may still claim the childless EIC, if you would otherwise qualify.
Earned Income, Disqualifying Income
The credit is limited by earned income, including:
- wages, salary, tips, commissions,
- union strike benefits,
- jury duty pay,
- certain disability pensions,
- net earnings from self-employment earnings minus 50% of the self-employment tax. For the self-employed, net losses are subtracted from wages or other income earned as an employee, if any.
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:
- taxable and tax-exempt interest
- dividends
- rent and royalty income
- capital gains
- passive income
Presumably, taxpayers receiving large amounts of unearned income do not need the EIC. The EIC cannot be claimed by anyone claiming the foreign income exclusion.
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 EIC tax table in IRS Publication 596, Earned Income Tax Credit. If the taxpayer has qualifying children, then Schedule EIC should be filed with Form 1040, listing the qualifying children and their Social Security numbers. To calculate the EIC, taxpayers are classified into groups based on filing status and the number of qualifying children: 0, 1, 2, 3 or more.
The EIC calculation is based on these numbers, stipulated by IRC §32, some adjusted for inflation:
- Credit Base: this is the income that qualifies for the maximum credit.
- Credit percentage: for earned income which is less than the AGI, the income is multiplied by the credit percentage to yield the earned income credit.
- Phaseout amount: if earned income or AGI, whichever yields the lowest credit, exceeds this threshold, then the threshold phaseout amount is subtracted from income to yield the phaseout base.
- The threshold phaseout amount exceeds the earned income base and is set by law, specifically IRC §32. Those with income between the earned income base and the threshold phaseout amount get the highest EIC available for their group.
- Phaseout percentage: the phaseout base is multiplied by the phaseout percentage, which is, then, subtracted from the maximum credit amount.
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:
- If Earned Income < Credit Base, then
- EIC = Earned Income × Credit %
- If Credit Base < Earned Income < Phaseout Amount, then
- EIC = Maximum EIC for the Taxpayer's Group, which is based on Filing Status and Number of Qualifying Children
- If Total Income > Phaseout Amount, then
- EIC = Maximum EIC − (Total Income − Phaseout Amount) × Phaseout %
- Therefore, the EIC is not available when income becomes high enough, such that: (Income − Phaseout Amount) × Phaseout % ≥ Maximum EIC
This is how the earned income credit is calculated according to the EIC worksheet found in IRS Publication 596, Earned Income Tax Credit.
- Enter your earned income, the income earned from work.
- Look up the EIC from the table for that amount.
- Enter your adjusted gross income (AGI) from Form 1040.
- If your AGI is less than a certain amount, then your credit depends only on your earned income. The reason for this special rule is to ensure that if you make a contribution to your retirement account or Health Savings Account or you claim a deduction, such as student loan interest, which will lower your AGI, it will not also lower your earned income credit, if your income is before the peak EIC.
- Otherwise, 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 income. This graph shows that the maximum credit allowable phases out at much lower adjusted gross income (AGI) levels.
Chart showing how the earned income tax credit varies with income for taxpayers with no children, 1 child, 2 children, and 3 or more children.
This graph shows how the earned income tax credit changes for a different number of children and different levels of earned income for any tax year.
EIC Related Penalties
The IRS assesses penalties against anyone who fraudulently claims the EIC or flagrantly violates the rules. If the IRS sends a deficiency letter denying the EIC, the credit cannot be claimed in future years unless Form 8862 is filed. The credit can be claimed if the IRS re-certifies eligibility, in which case, Form 8862 need not be filed again unless the IRS denies the EIC again.
Future credits are denied for 2 years if the taxpayer disregarded the rules in claiming the EIC. 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
There will be a longer wait for refunds for people claiming the Additional Child Tax Credit and the Earned Income Tax Credit. The EIC is fully refundable: 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 EIC and the ACTC.
The IRS is required to delay the refunds until at least February 15 for time 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 those 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
The American Rescue Plan Act (ARPA)
The American Rescue Plan Act (ARPA) changes EIC 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.
- The minimum age for childless EIC is reduced from age 25 to age 19 and the maximum age of 65 is eliminated.
- However, the minimum age is 24 for a student attending school at least 5 months during the year and age 18 for certain former foster and homeless youths.
- The credit percentage increases from 7.65% to 15.3%.
- The earned income amount to receive the maximum EIC increases from $7,100 to $9,820, yielding a maximum 2021 EIC for a taxpayer without qualifying children to $1,502 (= $9,820 × 15.3%).
- The phaseout threshold increases from $8,880 to $11,610. (A higher phaseout threshold will apply to MFJ.)
- Permanent change: Taxpayers ineligible for the EIC because their children do not have Social Security numbers valid for employment may claim the childless EIC.
- Permanent change: Married filers may be treated as unmarried for EIC purposes if:
- The taxpayer lived for more than 1/2 year with a qualifying child, and the taxpayer:
- either didn’t live with their spouse the last 6 months of the year, or
- has a decree (other than a divorce decree), instrument, or written agreement and doesn’t live with their spouse by yearend.
- The taxpayer lived for more than 1/2 year with a qualifying child, and the taxpayer:
- The investment income limit rises to $10,000 in 2021, then adjusted for inflation thereafter.
- Taxpayers may substitute their 2019 earned income to calculate the 2021 EIC only if their 2019 income was higher. If you are eligible, only choose this option if it yields a higher credit.
- Because of the Covid-19 pandemic, the new Consolidated Appropriations Act for 2021 (H.R. 133), signed into law on December 27, 2020, allows taxpayers to substitute 2019 earned income for 2020 earned income for both the Earned Income Tax Credit and/or for the Additional Child Tax Credit, if it is better to do so, but this substitution may not be used to calculate any other tax items, such as gross and taxable income. Spouses filing jointly must make the same election. If the taxpayer elects to use nontaxable combat pay, the 2019 rather than the 2020 nontaxable combat pay should be used to calculate the credit.
Qualifying Children | Maximum EIC | 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), 2021: Investment Income ≤ $10,000 Source: Rev. Proc. 2021-23 | ||
0 | $1,502 | $21,400 ($27,400) |
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) |
The American Rescue Plan Act (ARPA), 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: EIC Income Limits, Maximum Credit Amounts and Tax Law Updates
Qualifying Children | Maximum EIC | 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: EIC Income Limits, Maximum Credit Amounts and Tax Law Updates