Earned Income Tax Credit Explained
TABLE OF CONTENTS
What Is The Earned Income Tax Credit?
Earned Income Tax Credit Eligibility Requirements
How Much Is The 2023 Earned Income Tax Credit Worth?
What Is The Maximum Gross Income For Taxpayers To Qualify For The EITC?
Can Taxpayers Claim The Earned Income Tax Credit For Previous Tax Years?
What Happens If Taxpayers Make An Error When Claiming The Earned Income Tax Credit?
Frequently Asked Questions
Can Self-Employed Individuals Claim The Earned Income Tax Credit?
What Is The Difference Between Non-Refundable And Refundable Tax Credits?
What Is The Difference Between Tax Credits And Tax Deductions?
Key Takeaways:
- The earned income tax credit (EITC) is a refundable IRS tax credit that can be claimed by low- to moderate-income workers when they file their tax returns.
- To be considered eligible for the earned income tax credit without a child, taxpayers must be between the ages of 25 and 65, earn an income of less than $59,187, have resided in the U.S. for at least half of the year, and not be claimed as a dependent on the tax return of another filer. If claiming qualifying children, each child must meet the age, relationship, and residency requirements.
- In 2023, the earned income tax credit ranges in value from $600 to $7,430, depending on the filer’s income level, filing status, marital status, and how many qualifying children they have.
- Taxpayers can claim the earned income tax credit for previous tax years for up to three years after the deadline of the tax return if they were eligible for the EITC during that year but failed to claim the credit.
What Is The Earned Income Tax Credit?
The earned income tax credit is a refundable tax credit for low- to moderate-income workers, especially those individuals and couples with children. Qualifying taxpayers who have worked in the past tax year can observe significant reductions in their tax liability and may even be eligible to receive a tax refund when claiming the earned income tax credit.
Earned Income Tax Credit Eligibility Requirements
The IRS offers an EITC Qualification Assistant tool to help taxpayers determine if they are eligible to claim this credit amount when they file their tax returns.
The basic requirements for the EITC include:
- Earning an income of less than $59,187
- Earning investment income that is less than $10,300 for the 2022 tax year or $11,000 for the 2023 tax year
- Having a valid Social Security number before the 2022 tax return deadline, including filing extensions
- Being a United States citizen or a resident alien for the full year
- Not filing IRS Form 2555, Foreign Earned Income
- Being between the ages of 25 and 65 if their filing status is single and claiming the credit without qualifying children
- At least one spouse being between the ages of 25 and 65 if their filing status is married and filing jointly and claiming the credit without qualifying children
- If married but not filing a joint tax return with their spouse, meeting certain rules
Certain taxpayers have special qualifying rules for the EITC, including:
- Members of the military
- Members of the clergy
- Taxpayers and the relatives of taxpayers with disabilities.
Qualifying Child Eligibility Requirements
Taxpayers who plan to claim one or more children when filing using the earned income credit must ensure that each child meets certain eligibility requirements, including the following:
- Relationship with the child: To claim a qualifying child for the EITC, the child can be the biological child, adopted child, foster child, stepchild, or grandchild of the taxpayer. Other eligible relationships include if the qualifying child is the taxpayer’s sibling, step-sibling, half-sibling, or the child of the taxpayer’s sibling.
- Age of the child: To be considered an eligible child for the EITC, the child must be 18 years old or younger at the end of the year. The child must also be younger than the taxpayer or the taxpayer’s spouse if they file their tax return jointly. If the child was a full-time student during the tax year, they must be 23 years old or younger. If the child is permanently or totally disabled, there is no age limit for the EITC.
- Residence of the child: Eligible children for the EITC must have lived with the taxpayer or their spouse in the U.S. for over 6 months of the year.
What Information Is Required To Claim Children With The EITC?
The information required to claim children with the earned income tax credit includes:
- The child’s full name (exactly as reported on their Social Security card).
- The child’s Social Security number.
- The child’s date of birth.
How Much Is The 2023 Earned Income Tax Credit Worth?
The value of the 2023 EITC can range between $600 and $7,430, depending on the taxpayer’s filing status and how many children they claim as dependents.
What Is The Maximum Gross Income For Taxpayers To Qualify For The EITC?
The maximum gross income that taxpayers can earn to still qualify for the earned income tax credit depends on how many qualifying children they have and whether they are single or if they are joint filers.
Single Filers:
- 0 Children: $17,640
- 1 Child: $46,560
- 2 Children: $52,918
- 3 Or More Children: $56,838
Married Joint Filers:
- 0 Children: $24,210
- 1 Child: $53,120
- 2 Children: $59,478
- 3 Or More Children: $63,398
Can Taxpayers Claim The Earned Income Tax Credit For Previous Tax Years?
If taxpayers are just now learning about the earned income tax credit but realize that they would have been eligible to claim this tax credit for previous tax years, the good news is that there is a three-year deadline to file and claim a refund.
Here are the deadlines for claiming the earned income tax credit for previous tax years:
- 2019 Tax Returns: The deadline is July 15, 2023
- 2020 Tax Returns: The deadline is May 17, 2024
- 2021 Tax Returns: The deadline is April 18, 2025
In order to file a tax return for a prior year for the first time, taxpayers must fill out IRS Form 1040 and, if they had a qualifying child during that tax year, a Schedule EIC.
If the taxpayer already filed a tax return for a prior tax year but failed to claim the earned income tax credit even though they were eligible, they can claim the credit by filing an amended tax return.
What Happens If Taxpayers Make An Error When Claiming The Earned Income Tax Credit?
If taxpayers make an error in the portion of their tax return involving the earned income tax credit, they may experience a delay in receiving their full tax refund. In the case that the whole claim is denied by the IRS, the taxpayer is responsible for the following:
- Paying back any EITC amount they have been refunded in error, along with any accrued interest.
- Filing IRS Form 8862, Information to Claim Certain Credits After Disallowance before reclaiming the credit in a situation where it was not a math or clerical error causing the credit to be reduced or denied.
Frequently Asked Questions:
1. Can Self-Employed Individuals Claim The Earned Income Tax Credit?
All income earners can be considered eligible for the earned income tax credit if they meet the other requirements, whether they are wage-earning employees or self-employed. Here are the types of income that qualify for the EITC:
- Compensation in the form of wages, salaries, or tips
- Benefits received from a union strike or long-term disability prior to reaching the minimum retirement age
- Net income earned from self-employment
- Gross income received as a statutory employee, defined as an independent contractor according to common law rules.
Here are the types of income that do not qualify as earned income for the EITC:
Types of income that do not qualify as earned income for the credit include:
- Alimony
- Child support
- Pay received for work while in prison
- Retirement income
- Social Security benefits
- Unemployment benefits
2. What Is The Difference Between Non-Refundable And Refundable Tax Credits?
Both non-refundable and refundable tax credits reduce a taxpayer’s tax bill by a set dollar amount, but the two types have different impacts on how much money will be saved.
Non-Refundable Tax Credits
If a non-refundable tax credit has a greater value than the tax bill, the tax liability will be reduced to zero and the excess credit amount will be lost. Some examples of non-refundable tax credits include the child and dependent care credit, the credit for other dependents, the federal adoption credit, and the lifetime learning credit.
Refundable Tax Credits
If a refundable tax credit has a greater value than the tax bill, the tax liability will be reduced to zero and the excess credit amount will be rewarded to the taxpayer in the form of a tax refund. Some examples of refundable tax credits include the earned income tax credit, the child tax credit, and the American opportunity tax credit.
3. What Is The Difference Between Tax Credits And Tax Deductions?
Tax credits and tax deductions are both legal methods of lowering what a taxpayer pays during the tax season. However, for each of these tax advantages, there is a different approach to lowering the tax bill.
Tax Credits
Tax credits directly lower the amount the taxpayer owes in taxes by a set dollar amount.
Tax Deductions
Tax deductions lower the taxpayer’s tax bill by subtracting deductions from their taxable income, which in turn lowers the tax balance due.
Tax credits like the earned income tax credit can significantly benefit low- to moderate-income individuals and families by reducing their tax debt and potentially earning them a tax refund. If you are unsure about your eligibility for claiming income tax credits or want to receive tax help from an experienced tax preparer, hiring a tax professional at Ideal Tax will ensure you achieve optimal tax savings when you file your taxes this year.
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