What Is the Earned Income Tax Credit?

What Is the Earned Income Tax Credit? article image.

The earned income tax credit (EITC) is a refundable tax credit designed to provide relief for low-to-moderate-income working people. In 2019, 25 million taxpayers received about $63 billion in earned income credits. This year, the EITC is getting a second look from taxpayers because many have experienced income changes due to COVID-19. If you meet eligibility requirements, you may qualify for a credit and may even receive a tax refund. Here's what you need to know.

How Do Earned Income Tax Credits Work?

If you qualify for the EITC, you can apply the credit directly toward your tax bill. For example, if you owe the U.S. government $2,300 in taxes for 2020 and you qualify for an EITC of $3,584, the U.S. government owes you $1,284. Because the EITC is a refundable tax credit, you can receive this money as a tax refund.

Income eligibility for the EITC is based on your adjusted gross income and your earned income. Adjusted gross income is all the money you made in a year minus specific deductions and credits. Earned income includes:

  • Wages, salaries and tips
  • Pay received for gig work or contracting
  • Union strike benefits
  • Nontaxable combat pay
  • Certain disability benefits received before you reach minimum retirement age
  • Net earnings from self-employment

Other types of income are not considered earned. These include:

  • Interest and dividends
  • Retirement income
  • Social security
  • Unemployment benefits
  • Alimony
  • Child support
  • Pay received for work while in prison

How Do I Qualify for the Earned Income Credit?

EITC rules vary depending on your filing status and family size. Here are the basics.

For All Taxpayers

  • Your earned income and adjusted gross income must be within defined limits (see table below).
  • Your investment income cannot exceed $3,650.
  • If married, you and your spouse file jointly, not separately.
  • You and your spouse have valid Social Security numbers.
  • You were a U.S. citizen or resident alien for the full tax year.
  • You have not filed Form 2555 (related to foreign income).

For Single Taxpayers

If you don't have children—or don't have "qualifying children" as described below—you must meet these additional requirements:

  • Be older than 25 but younger than 65 at the end of the tax year.
  • Live in the United States for more than half the year.
  • Not be the dependent or "qualified child" of another taxpayer.

What Is a "Qualifying Child?"

For the purposes of the EITC, your "child" does not have to be your biological child. Rather, they must live with you in the U.S. for more than half the year, and have one of the following qualifying relationships with you:

  • Son or daughter
  • Stepchild
  • Legally adopted child
  • Foster child
  • Sibling (step, half or whole)
  • A descendant of any of the above

Your qualifying child must also be younger than you are and under the age of 19 at the end of the tax year—24 if they are a full-time student. A child who is permanently and totally disabled can be any age.

What Are the EITC Income Limits?

Income limits for EITC eligibility vary depending on your filing status and the number of qualifying children you claim. The chart below shows the 2020 EITC adjusted gross income limits for taxes filed in 2021.

2020 EITC Adjusted Gross Income Income Limits
Number of Children ClaimedSingle, Head of Household or WidowedMarried Filing Jointly

Source: IRS

Additionally, if you have more than $3,650 in unearned income from investments—including stock dividends, rental properties or inheritance—in 2020, you do not qualify for the EITC. Also note that if your 2019 earned income helps you qualify when your 2020 earned income does not, you can use your 2019 earned income to calculate your EITC this year.

One important note: If you want to receive the EITC, you must file a tax return—you will not get it otherwise. This is true even if you don't owe any taxes or aren't otherwise required to file a return.

What Is the Maximum EITC Amount I Can Claim?

Again, the size of your tax credit will depend on the size of your family. Here is the maximum EITC you can receive for the 2020 tax year:

  • $6,660 with three or more qualifying children
  • $5,920 with two qualifying children
  • $3,584 with one qualifying children
  • $538 with no qualifying children

Is the Earned Income Tax Credit Worth It?

The IRS reports that roughly 20% of eligible taxpayers don't claim the EITC. But if you qualify, it's worth pursuing. Whether it merely reduces your tax bill or secures you a refund, the EITC represents hundreds or thousands of dollars in available relief.

Are you confused about whether or not you're eligible? Many online tax programs include EITC calculations to help you puzzle this out. The IRS also offers an online EITC Assistant and live volunteer help through its Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites.

Are There Other Tax Credits Available?

Many other tax credits are available to both individuals and families. In particular, taxpayers who qualify for the EITC may want to consider the child tax credit (CTC) and the additional child tax credit (ACTC). Both of these credits target families with similar income and qualifying characteristics. In 2020, the ACTC is refundable, meaning that if you qualify and your credits exceed your tax bill, you can receive the difference as a refund.

Also, be aware of new tax changes for the 2021 tax year. The American Rescue Plan Act, passed in March of this year, may make it easier for single taxpayers to qualify for the EITC—and may offer them more relief. Look for additional changes to EITC rules, along with enhancements to the child tax credit and more for 2021.

Claiming the EITC may require a bit of effort, but much of the work is math you're already doing to file your taxes. Receiving this tax credit may help you and your family weather a difficult financial year, and that's welcome news after the many challenges of 2020.