Understanding the Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is one of the most valuable credits available to working individuals and families with low to moderate income. It can significantly reduce the amount of tax owed, and in many cases, result in a larger refund. As a tax professional, I've seen how impactful this credit can be, especially for families raising children. That said, individuals without children may also qualify, depending on their income and filing status.
The credit is based in part on the number of qualifying children claimed, up to a maximum of three. Even if a taxpayer has more than three qualifying children, the credit amount is capped at the level for three.
Who Qualifies for the EITC?
Let's walk through the basics. To be eligible for the EITC, you must:
- Have earned income (from wages, self-employment, or similar work).
- Have a valid Social Security number.
- Be a U.S. citizen or resident alien.
- Not file as “married filing separately.”
- Meet certain income limits based on your filing status and number of qualifying child
What Counts as Earned Income?
Not all income is treated the same when it comes to the EITC. “Earned income” is income you receive from working, whether you're an employee, self-employed, or running your own business.
Here are examples of what the IRS considers earned income:
- Wages, salaries, and tips (reported on Form W-2)
- Gig work (rideshare driving, deliveries, selling goods online, freelance services, etc.)
- Self-employment income (owning a business or farm)
- Certain disability benefits (received before reaching retirement age)
- Nontaxable combat pay (if you choose to include it)
Not considered earned income:
- Income earned while in prison
- Investment earnings (like interest and dividends)
- Social Security benefits
- Unemployment compensation
- Child support or alimony
Investment Income Limits
Even if you have some investment income, you may still qualify for the EITC. For 2024 tax returns, that limit is $11,600. Here's what counts as investment income:
- Interest from savings
- Dividends from stocks
- Capital gains
- Rental income
- Royalties or passive income
Even if you meet every other requirement, exceeding the investment income limit will disqualify you from receiving the credit.
Who Is a Qualifying Child?
Only one person can claim the same child per year. If multiple people attempt to, the IRS has tie-breaker rules to determine who qualifies.
If you're claiming the EITC with children, each child must meet these five key tests:
- Relationship: Must be your child, stepchild, adopted child, sibling, step-sibling, or a descendant of any of these (like a grandchild or niece/nephew). Foster children also qualify if placed by a government agency or court.
- Age: Under 19, or under 24 if a full-time student for at least five months of the year. There's no age limit if the child is permanently and totally disabled.
- Residency: Must live with you in the U.S. for more than half the year.
- Filing status: Cannot file a joint return with a spouse unless just to claim a refund.
- SSN: Must have a valid Social Security number.
How Do You Claim the EITC?
The EITC is claimed on your federal tax return, Form 1040, along with Schedule EIC if you're claiming children.
If you file online through FileYourTaxes.com, the system will automatically determine your eligibility and include the Schedule EIC when applicable. It's seamless and ensures you won't miss out if you qualify.
If you're filing a paper return, make sure you:
- Prepare Form 1040
- Complete and attach Schedule EIC
- Include any supporting forms, like your W-2.
- Double-check that your income meets all requirements
Why It Matters
The EITC is more than just a tax break, it can make a real difference for working families, often resulting in a meaningful refund that helps with day-to-day expenses. Understanding the rules ensures you get the credit you've earned.
In my experience, many eligible taxpayers miss out on this credit simply because they don't realize they qualify or assume it's too complicated. But it's worth checking, every year I see how even a modest refund can provide real breathing room.
