Earned Income Tax Credit 2023: Learn How to Benefit from Tax Credits

Benefits of the Earned Income Tax Credit. How does it work? Who qualifies for the tax credit? Read on to get more insights on this.

There are several tax breaks that help reduce the amount of tax you owe the government. The Earned Income Tax Credit is one of them. It is a tax break or relief designed to reduce the tax burden for low and moderate-income earners.

In other words, lower-earning individuals get larger tax credits. Also, families with children are often among the largest beneficiaries.

For 2023, significant enhancements have expanded EITC eligibility and increased credit amounts. Here is a comprehensive guide to EITC for tax year 2023.

Table of Contents

What is EITC (Earned Income Tax Credit)?

The first thing you should understand here is that EITC is among the refundable federal income tax credits. It is specially designed for low- to moderate-income workers and families raising children.

EITC reduces tax liability and provides a refund even if no income tax is owed. The EITC amount depends on filing status, income, and number of qualifying children.

Congress originally approved thetax credit legislation in 1975. The policy goals were to offset payroll taxes, reward work, and supplement wages for families raising children.

The EITC has received bipartisan support and expansions over the years. In fact, it is currently one of the largest and most effective anti-poverty programs in the US.

How the Earned Income Tax Credit Works

The EITC is based on earned income from wages, salaries, tips, freelance earnings, and self-employment income. As earned income increases, the EITC amount rises until it reaches a maximum level and then phases out at higher incomes [1].

For 2023, the EITC falls between $600 and $7,430. The amount is mainly based on the filing status and the number of children or dependents.

If you are filing tax credit for the 2023 tax year, the EITC phases out completely at the following adjusted gross income amounts based on the number of children:

0 children – $17,640
1 child – $46,560
2 children – $52,918
3 or more children – $56,838

Note: These figures represent the maximum adjusted gross income for individuals who file as singles, widowed, or head of the household. If you are filing as a couple or joint filers, the maximum adjusted gross income for the phase-out changes as follows:

0 children – $24,210
1 child – $53,120
2 children – $59,478
3 or more children – $63,398

According to these figures, it is clear that the EITC targets low- and moderate-income workers. The credit encourages employment and effectively supplements wages. Workers receive the tax credit when they file their federal tax return, which the IRS pays from mid-February [2].

Here is the maximum amount of EITC you can receive in 2023 based on your filing status and the number of children:

	Number of children
	0	1	2	Three and above
Earned Income	$7,840	$11,750	$16,510	$16,510
Maximum Tax Credit	$600	$3,995	$6,604	$7,430

How to Qualify for Earned Income Tax Credit

According to the IRS, you must meet certain criteria before qualifying for the EITC. Taxpayers must meet all the followingrequirements:

Have earned income from wages, salaries, and tips, etc.
Have investment income under $11,000
Have adjusted gross income within EITC limits – not exceeding $59,187
Cannot be claimed as dependent on another return
Must be a US citizen or resident alien
Cannot file a tax return as married filing separately
Must have a valid Social Security number
Reside in the US for 6 months or more (or meet overseas armed forces deployment conditions)

Workers without children must also be between 25 and 65 years old [3]. Additional tests apply to taxpayers with children to establish relationships and residency.

Qualifications for EITC in 2023

For 2023, the EITC rules and limits have been expanded in several ways:

Maximum credit amounts increased
Income limits raised across all categories
The minimum age was lowered to 19 for workers without children
Maximum age increased to 67 for childless filers
Phase-out income thresholds increased for married joint filers
The investment income limit was raised from $10,300 to $11,000

So, the EITC eligibility rules are more generous for 2023. More low-income workers and families will qualify and receive larger tax credits.

Earned Income Tax Credit Example

As mentioned earlier, earned income tax credit reduces the amount of tax liability. Take this example:

A taxpayer has a tax liability of $3,000. Now, if the individual has a tax credit claim of $600, here is what they will end up paying to the IRS. $3000 – $600 = $2,400.

If, on the other hand, a taxpayer with the same tax liability ($3,000) can claim $3,500, their tax liability will be as follows. $3,000 – $3,500 = -$500. In this case, the taxpayer can file for a tax refund of $500 since the tax credit exceeds their tax liability.

These examples demonstrate how the EITC can provide good money in tax refunds for low-income families with children. Even childless workers can get a few hundred dollars.

The exact credit amount will depend on total earned income and other specific factors. IRS Publication 596 [4] has tables showing EITC amounts.

Who is a Qualifying Child in EITC?

Taxpayers with one or more qualifying children can receive a significantly higher Earned Income Tax Credit amount. A qualifying child must meet these tests:

Relationship Test: A qualifying child should be a biological child, adopted, or foster. Siblings, stepkids, or descendants like a grandchild also qualify.
Age: The child should be below 19 years at the end of the tax year or below 24 years, in the case of full-time students. No age limit for permanently disabled persons [4].
Residency: A child that qualifies here must have lived with a taxpayer in the US for more than 6 months in the tax year. Exceptions for absences like school or military service.
Joint Return Test: A qualifying child cannot file a joint tax return for the year.
Child Tax Credit Test: The child must meet similar relationship, residency, and age tests for Child Tax Credit.

How to Claim Earned Income Tax Credit

To receive the EITC, eligible taxpayers must file a federal income tax return and claim the credit. This applies even if they owe no tax or are not otherwise required to file a return.

The credit can be claimed onForm 1040 or 1040-SRwhen filing by mail. Most tax software programs will determine EITC eligibility and amount based on income, family size, and other inputs.

Tax returns claiming EITC must be filed by April 15, 2024, to receive the credit for 2023. However, filing as early as possible in 2023 allows taxpayers to get refunds faster. The IRS issues most EITC refunds by February or March each year.

Claiming Earned Income Tax Credit Without a Child

Workers without a qualifying child can still claim the EITC but at a lower maximum credit of $560 for 2023. The significant requirements to claim EITC without children include:

Must be at least 19 years old (and under age 67)
Cannot be claimed as a dependent by another person
Must reside in the US for at least 6 months
Must have earned income and AGI within limits for childless EITC

For 2023, the minimum earned income to qualify is $7,430 for childless workers. The income limits, credit amount, and age range are more restrictive compared to EITC rules for workers with children. However, the EITC can still provide some tax relief for lower-income individuals without dependents.

Common EITC Errors

The EITC has a high improper payment rate, meaning many returns contain errors in claiming the credit. The IRS estimates about 25% of EITC payments each year are paid in error. Common mistakes include:

Claiming a child who does not meet the relationship or residency tests
Married couples incorrectly filing as single or head of household
Exceeding the investment income limit
Not reporting all income sources
Claiming a child who is being claimed by another person
Incorrect filing status, marital status, or Social Security numbers

The IRS audits heavily on EITC compliance. Taxpayers who knowingly claim incorrect EITC amounts may be banned from the credit for 2 years or 10 years if previously flagged for EITC errors. Using a reputable tax preparer can help avoid costly mistakes.

The IRS also warns taxpayers of EITC scams where fraudsters promise inflated refunds through misreporting of income, children, or filing status. Any communication regarding federal tax returns or refunds should be cross-checked through official IRS channels.

Impact of Earned Income Tax Credit

The Earned Income Tax Credit provides substantial financial benefits to low-income families and individuals. Some key impacts of EITC include:

Raised 5.6 million people out of poverty in 2018. These included 3 million children
Provides an annual average refund of $2,400 per family
Refunds circulate in local economies and support jobs
Reduces the impact of payroll taxes for low-earners
Encourages and rewards work with higher after-tax income
Supported by both political parties as an anti-poverty measure

Research shows EITC boosts health outcomes for mothers and children, improves school performance for kids, and increases college enrollment rates. It also encourages labor force participation for single parents.

However, EITC could do more to boost financial security. Estimates show up to 20% of eligible workers do not claim EITC each year [5]. More outreach and assistance with tax filing could help improve EITC usage rates.

Future Outlook

Several proposals exist to build on recent expansions and further improve EITC benefits:

Making the larger credit for childless workers permanent
Providing automatic advance payments of EITC during the year
Extending eligibility to low-income students and caregivers
Lowering the minimum eligibility age for workers with children
Adjusting income phase-out thresholds for family size
Improving filing and take-up rates through outreach

The EITC will remain a key component of the federal government’s efforts to support low-income families through the tax code. Higher EITC benefits can lift more working households out of poverty.

Conclusion on Earned Income Tax Credit

The Earned Income Tax Credit provides substantial financial assistance and work incentives for low- and middle-income families and individuals. The significant enhancements for 2023 expand EITC eligibility and increase tax credits for many households.

Taxpayers who meet the income limits and other qualifications should be sure to claim the EITC if they are eligible. The average EITC in 2023 will exceed $2,400. This tax relief can help working families cover bills, afford child care, save for emergencies, and pay for education.

Related Resources

References:

This post contains affiliate links – which means that if you click on any link and purchase something (anything!), we get paid a commission. Purchases are only made through links; no extra cost is added to the price at all!

Earned Income Tax Credit 2023: Learn How to Benefit from Tax Credits - Centmatters-Every Penny Counts (2024)