What Is the Earned Income Tax Credit (EITC)?
The earned income tax credit (EITC) is a refundable tax credit that helps certain U.S. taxpayers with low earnings by reducing the amount of tax owed on a dollar-for-dollar basis. Taxpayers may be eligible for refunds if their tax credit exceeds their tax liability for the year.
Key Takeaways
- The earned income tax credit (EITC) is a refundable tax credit used to supplement the wages of low-income workers and help offset the effect of Social Security taxes.
- The EITC is available only to taxpayers with low or moderate earnings, whether or not they have qualifying dependents.
- To be eligible for the EITC, a taxpayer must have accrued earnings during the tax year. However, investment income cannot have surpassed a specified level.
- The American Rescue Plan Act (ARPA) of 2021 revised a number of EITC rules for the 2021 tax year; EITC requirements have continued to evolve since the pandemic.
Understanding the Earned Income Tax Credit (EITC)
The earned income tax credit (EITC), also called the earned income credit (EIC), was conceived as a “work bonus plan” to supplement the wages of low-income workers and help offset the effect of Social Security taxes. It continues to be viewed as an anti-poverty tax benefit.
The EITC is available only to taxpayers with low or moderate earnings, whether or not they have qualifying dependents. To claim the credit, an individual taxpayer (or if the taxpayer is married, the individual or their spouse, filing jointly) with no qualifying dependents must be at least 19 years old and must live in the United States for more than half of the tax year.
The credit percentage, earnings cap, and credit amount vary according to a taxpayer’s filing status and number of dependents. Qualifying dependents, which can include dependent children who are under age 19, students under age 24, or dependents with a disability. These factors also determine the income phaseout range over which the credit diminishes to zero. No credit is allowed above the ceiling for the phaseout range.
To be eligible for the EITC, a taxpayer must have earnings but cannot have investment income in excess of a specified level. For 2023, the maximum level of investment income was set at $11,000, increasing to $11,600 in 2024. Age, relationship, and residency requirements also apply with respect to qualifying dependents.
The credit reduces the amount of tax owed on a dollar-for-dollar basis. If the amount of the EITC is greater than the amount of tax owed by a taxpayer, then the taxpayer may be eligible for a refund.
The EITC is one of the most important tax credits available to individual taxpayers. The taxpayer must be a U.S. citizen or a resident alien for the entire year and have a valid Social Security number by the tax return’s due date. The amount of credit that can be claimed on a tax return depends on the taxpayer’s annual earned income for the tax year, filing status, and number of qualified dependents.
If you qualify for the EITC, you may or may also be eligible for the Child Tax Credit, Child and Dependent Care Credit, or Education Credits.
Example of the EITC
A refundable tax credit reduces the value of a taxpayer’s liability, dollar for dollar, and results in a refund if the liability is reduced below zero. For example, an individual who has a tax bill of $2,900 and can claim a $529 credit will owe $2,371 ($2,900 - $529 = $2,371).
That lower amount is the total that the taxpayer must pay to the Internal Revenue Service (IRS) for the year. If a taxpayer has a total tax liability of $1,000 and a credit of $1,500, then the taxpayer should be entitled to a refund of $500.
Qualifying for the EITC
To qualify for the EITC, a taxpayer’s earned income and adjusted gross income (AGI) must be below certain income limits. The limits on the income level, credit amount, and investment income for a single or married taxpayer vary, depending on the number of qualifying dependents in the household. For the 2023 tax year, those limits were as follows, with 2024 figures updated in the table below as well.
The IRS has posted an EITC calculator. The EITC calculator helps determine eligibility for the credit and provides an estimate of the credit amount. To use the calculator, you can input information about your income, qualifying children or relatives, filing status, and relevant financial documents such as W-2s and 1099s. You'll also need to include details about taxes withheld or money received, as well as any relevant expenses or income adjustments. Note that the calculator should be used for estimation purposes only and does not implicitly mean you will get the credit.
| 2023 Earned Income Tax Credit Qualifications | |||
|---|---|---|---|
| Children or Relatives Claimed | Maximum adjusted gross income (AGI) (Single, Head of Household, Widowed, or Married Filing Separately*) | Maximum AGI (Married Filing Jointly) | EITC Limit |
| 0 | $17,640 | $24,210 | $600 |
| 1 | $46,560 | $53,120 | $3,995 |
| 2 | $52,918 | $59,478 | $6,604 |
| 3 | $56,838 | $63,698 | $7,430 |
| 2024 Earned Income Tax Credit Qualifications | |||
|---|---|---|---|
| Children or Relatives Claimed | Maximum adjusted gross income (AGI) (Single, Head of Household, Widowed, or Married Filing Separately*) | Maximum AGI (Married Filing Jointly) | EITC Limit |
| 0 | $18,591 | $25,511 | $632 |
| 1 | $49,084 | $56.004 | $4,213 |
| 2 | $55,768 | $62.688 | $6,960 |
| 3 | $59,899 | $66.819 | $7,830 |
*Taxpayers who claim the EITC under married filing separately must meet the eligibility requirements under the special rule in the American Rescue Plan Act (ARPA) of 2021.
Taxpayers who are married filing separately can qualify for this credit provided that they meet the eligibility requirements under the ARPA. The tax law provides special EITC rules for clergy and members of the military stationed abroad, and specific rules coordinating the credit with the tax laws applicable in Puerto Rico, Guam, and American Samoa.
How to Claim the EITC
If you can claim the EITC), be aware that your refund may be delayed as the IRS cannot issue EITC and Additional Child Tax Credit (ACTC) refunds before mid-February. Most EITC and ACTC-related refunds usually hit taxpayer bank accounts by March 1, assuming there are no other issues with their tax return. You can also track your IRS tax refund using the online tool or IRS2Go mobile app.
When filing, ensure you use the correct forms—either Form 1040 or Form 1040 SR—and include the Schedule EIC if you're claiming the EITC with a qualifying child. If you qualify for the EITC in prior years, you have up to three years from the due date of your tax return to file and claim a refund. Keep in mind that there are specific deadlines for each year. To file for prior years, use Form 1040 and the Schedule EIC if applicable, and if you previously filed a return but didn't claim the EITC when eligible, you can file an amended return.
What Is the Difference Between a Tax Credit and a Tax Deduction?
A tax credit lowers the amount of tax you owe on a dollar-by-dollar basis. For example, a $1,000 tax credit means that you owe $1,000 less in taxes. By contrast, a tax deduction lowers your taxable income. If your taxable income drops by $1,000 and you're in the 24% tax bracket, you'd save $240 in taxes.
How Much Income Can You Earn in Investments and Still Take the EITC?
For the 2023 tax year, the maximum investment income you can earn from investments rose to $11,000. For 2024, the maximum investment income is $11,600.
How Do You Qualify for the Earned Income Tax Credit?
In order to qualify for the earned income tax credit, a taxpayer must be a U.S. citizen or resident alien for the entire tax year, with a social security card that was issued before they file their tax return. In addition, they must have worked and had an earned income that was lower than the EITC income threshold for the tax year. Investment income must also be below a certain limit, and the taxpayer cannot claim foreign earned income that year. Members of the military, clergy, and dependents with disabilities also have special rules.
The Bottom Line
The EITC is a federal tax credit designed to provide financial assistance to low-to-moderate-income working individuals and families. It reduces the amount of taxes owed and can result in a refund for eligible taxpayers. The credit amount depends on income, filing status, and the number of qualifying children.
