In an effort to help individuals with low to moderate income and to reduce poverty, the United States provides a program called the “Earned Income Credit” (EIC). This program is designed to aid individuals who work for a living but earn low income. A qualifying individual can claim a credit from their tax return which can offset tax liability and result in a refund. This credit has helped families for years.
Earned Income Credit
The Earned Income Credit was passed in 1975 in an effort to reduce poverty and assist those who work to provide for their families but earn lower income levels. It’s often criticized because the credit discourages individuals from earning higher incomes since the credit phases-out as you earn higher income.
The earned income tax credit is available to use for the 2017, 2018 tax season. The IRS estimates that about 15% of eligible individuals do not claim this tax credit.
How Does the Earned Income Credit Work?
The EIC provides support for low and moderate income working parents (with qualifying children) in the form of tax credits. The tax credit is not as beneficial individuals without children but not having children does not disqualify you from the credit. Individuals receive a tax credit that can be claimed on Form 1040 which is a percentage of the individual’s earnings up to a certain maximum limit.
The maximum amount of credit for Tax Year 2017 is:
- $6,318 with three or more qualifying children
- $5,616 with two qualifying children
- $3,400 with one qualifying child
- $510 with no qualifying children
Who Qualifies for the Earned Income Credit?
Although the Earned Income Credit is available for all working individuals, it greatly benefits those with children. In order to qualify an individual must:
- have a valid social security number. All members of the family must have a social security number to qualify.
- file under the following filing status:
- Married filing jointly
- Qualifying wife or widower
- Head of household
- have less than $3,400 of investment income for the tax year.
- not file a Foreign Earned Income Form 2555 or Foreign Earned Income Exclusion
- have earned income and adjusted gross income within the IRS limits. See the Earned Income Tax Credit table below to see if you qualify for the income phase-out limits.
Earned Income Tax Table
The IRS provides a chart which can used to determine how much credit you can claim on your 2017 tax return. This earned income tax credit table can be found below:
To calculate the amount of earned income credit you can claim in tax year 2017, simply find the row that matches that amount of earned income in the first 2 columns of the table to your filing status and the number of qualifying children you claim on your tax return. The credit is based on a percentage of your earned income but also starts to phase-out as you increase your income. The credit also increases as the number of children claimed on your tax return increases.
|Filing status||Qualifying Children Claimed|
|Zero||One||Two||Three or more|
|Single, Head of Household or Widowed||$15,010||$39,617||$45,007||$48,340|
|Married Filing Jointly||$20,600||$45,207||$50,597||$53,930|
Source : IRS.gov
A single parent with 1 child that earned $28,500 in 2017 will receive an earned income credit of $1,772. To determine this amount, you can use the tax table to find the row for “at least 28,500 but less than 28,550” and looking for the amount in that row that applies to an individual claiming 1 child.
Earned income is defined as the income you earn working for an employer or self-employed. Examples of earned income are salaries and wages, royalties, commissions, profits from your business, self-employment income and many other types of income. Some types of incomes that are excluded from “earned income” are child support or alimony, social security benefits, unemployment benefits, pension and retirement income, interest income and many other types of income which are not “earned” from working.
Claiming the Earned Income Credit
You must claim the Earned Income Credit with your Federal Individual Income Tax Return (Form 1040 or 1040A). You will need to attach a Schedule EIC to the Federal Income Tax Return in order to claim the credit. On this form, you report your children’s names, social security number, birth year, whether they are a student or not, and other information which will determine if your child qualifies under the earned income credit.
TurboTax online can help you claim the Earned Income Tax Credit!
The earned income credit is a “refundable credit”. Refundable credits provide the most benefit because if the tax credit is larger than the tax liability on your tax return, it will result in additional refund of the difference. Non-refundable tax credits can only offset your tax liability to $0 but these credits do not result in a refund of the excess.
Per the IRS website – Starting in 2017, a new tax law will require the IRS to send refund checks claiming the Earned Income Credit or the Additional Child Tax Credit (ACTC) until February 15th. The earliest expected refunds would be received by the end of February. It’s recommended to electronically file and choose direct deposit method of refund to expedite the refund process.
It’s important to full understand the qualification and apply for the credit accordingly. An individual will be disallowed the earned income credit if they claim when not eligible due to “reckless or intentional disregard of the EIC rules”. Making fraudulent claims for the credit can disallow an individual for 10 years.
Many families benefit from this program which provides them with financial aid. As a refundable credit, it’s important to make sure you calculate and claim the correct credit to maximize your tax refund.