What is “Earned Income Credit”?

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Category: IRS FAQs

Written by Jonah Sparks

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Don’t say the IRS never does anything for the “little guy”. The earned income credit EITC is a refundable tax credit designed for working families and individuals with low to moderate income. The amount of the credit varies depending on your level of income and how many dependents you support.

To be eligible for the earned income credit, your earned income and adjusted gross income need to be within certain ranges. The amount of the tax credit varies based on your earned income and how many qualifying children you are supporting in your household.

For the years 2009 through 2012, the Earned Income Credit is temporarily increased for working families with three or more dependents. Previously the earned income credit maxed out at two dependents. The earned income credit will revert back to maxing out with two dependents starting in 2013.

The earned income tax credit is a great benefit for workers who don't make much money or to those who did work but then lost a job. This tax break returns to qualified individuals a portion of the taxes they paid. It can actually produce a tax refund for eligible filers who had no tax liability. Unfortunately, most tax credits are nonrefundable meaning they simply zero out a tax bill. For example, if you owe $800 and have a $1,000 credit, your bill of $800 is zeroed out but the remaining $200 is not returned to you. With a refundable credit such as the earned credit income, the IRS would refund the extra $200 to you.

There is however, a drawback to the credit. The filing process is rather complicated and typically eligible taxpayers don't have much cash to spare; they normally cannot afford professional help in filing for it. The IRS has an online program to help these filers.

The easiest way to find out if you qualify for the earned income credit is to use an application found on the IRS Web site called the EITC Assistant. This process will help you determine if you are eligible for the Earned Income Credit and will help you calculate the amount of the credit. You do not have to be a parent to qualify. Be aware that there are links to applications for more than one tax year so be sure to pick the right one.

Married couples who file separate returns are not eligible for the earned income credit. If you are married but haven’t lived in the same home as your spouse for the last six months of the year, then you may be able to file as head of household and take the credit.

The rules governing the earned income tax credit are rather complicated. Do yourself a favor and use the IRS website to determine if you qualify.

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