Claiming a tax credit is one way to lower your tax bill. And if the tax credit that you’re eligible for is refundable, you’ll be able to use it to boost your tax refund even if it reduces your tax liability below zero. One example of a refundable tax credit is the earned income tax credit. But not everyone qualifies for it. Read on to find out who the tax credit benefits and how you can claim it on your tax return.
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The Purpose of the Earned Income Tax Credit
Tax credits reduce your tax burden dollar for dollar. Typically, these tax breaks are designed to benefit a particular group of people. That’s certainly the case with the earned income tax credit.
The earned income tax credit (EITC) was introduced in 1975 to provide temporary tax relief to the working poor who had to pay Social Security taxes amid increases in the cost of energy and food. Three years later, it became a permanent tax break under the Revenue Act of 1978. Over the years, the EITC has been expanded and altered in order to reduce poverty and encourage low-income individuals to find work.
Despite its benefits to low-income individuals – especially those with children – the tax credit remains a controversial incentive. Some who dislike the EITC argue that it’s costly. Due to tax filing errors and fraud, the government has mistakenly handed out billions of dollars to workers who didn’t actually qualify for the credit.
How the Earned Income Tax Credit Works
The EITC offers a subsidy to low- and moderate-income Americans and their families. The amount that each worker qualifies for depends on various factors, including their earned income, adjusted gross income, filing status and whether or not they have a qualifying child.
Under the EITC program, workers with qualifying children tend to receive bigger tax credits than those without kids. For tax years 2018 and 2019, the maximum credit amounts for individuals without qualifying children are $519 and $529, respectively. For working families with at least three qualifying children, the maximum credit amounts are $6,431 and $6,557, respectively, for tax years 2018 and 2019. (Remember that you file your 2018 taxes by April 2019 and you file your 2019 taxes by April 2020.)
Qualifying for the Earned Income Tax Credit
In order to qualify for the EITC, you’ll need to meet certain rules. For one thing, you’ll need to have earned income, or taxable income from working for a company, running a farm or owning a small business. You cannot claim the tax credit if you don’t have a Social Security number or you’re married and you’re filing a separate tax return.
You’re also ineligible for the EITC on your 2018 taxes if you have more than $3,500 in investment income and your adjusted gross income exceeds a certain threshold. For example, for tax year 2018, you cannot claim the tax credit if you’re single, you have no children and your adjusted gross income exceeds $15,270. The table below offers a more complete breakdown of the EITC income limits depending on your filing status and how many qualifying children you’re claiming.
|EITC Income Limits|
|Filing Status||Qualifying Children Claimed|
|Single, Head of Household or Widowed||$15,270||$40,320||$45,802||$49,194|
|Married Filing Jointly||$20,950||$46,010||$51,492||$54,884|
|Maximum Credit Amount||$519||$3,461||$5,716||$6,431|
While having more children can increase the size of the credit you’re eligible for, your kids will have to meet a series of benchmarks if you want to claim them under the EITC program. Unless your children are completely disabled, they can only be considered qualifying children if they’re under the age of 19 by the end of the tax year or they’re full-time students under the age of 24. Your children must live in your home for more than six months out of the year and must be related to you (i.e. the child is your son, nephew, grandchild or foster child).
Finally, if you have a child who’s married, he can only be a qualified child if he’s not filing a joint tax return (or he’s only filing a joint tax return in order to get a tax refund). If you don’t have any qualifying children, you may be eligible for the EITC if you’re between the ages of 25 and 64 and no one else can claim you as a dependent. Special rules apply for disabled individuals, ministers, clergy members and members of the military.
Those who qualify for the EITC may also be able to get additional savings from the Child Tax Credit.
Claiming the Earned Income Tax Credit
If a worker wants to take advantage of the EITC, he or she must file taxes. Even if your tax liability is equal to zero, you’ll need to submit a tax return if you want to claim the tax credit.
To estimate the amount of your credit, you can use the worksheets included with the instructions for Forms 1040. If you need assistance, you can use the EITC assistant provided by the IRS.
The earned income tax credit offers working individuals and families an incentive if their income falls below the thresholds set by the IRS. Before claiming the credit, it’s important to ensure that you meet all of the qualifications and double-check that the information you’re providing on your tax return is accurate. To help you claim all of the credits and deductions that you qualify for, it’s a good idea to choose a good tax filing service. A good service will walk you through the filing process and get you the maximum refund available to you.
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