Many qualified taxpayers overlook the Earned Income Credit (EIC), potentially missing out on thousands of dollars at tax time. Here are 5 facts every taxpayer should know about the EIC.
Key Takeaways
• A married couple with three children can earn up to $63,698 (tax year 2023) and still be eligible for the Earned Income Credit (EIC).
• You may qualify for the EIC even if you don’t have a qualifying child, provided that you’re at least 25 or older but under 65, don’t qualify as a dependent of another person, and lived in the United States for more than half of the year.
• Qualifying earned income includes wages, salaries, tips, net earnings from self-employment, and more.
• If you received more than $11,000 (tax year 2023) in income derived from investments, you are ineligible for the EIC.
The Earned Income Credit (EIC)
For many Americans, it can be difficult to know which tax credits they qualify for and why. But tax credits are worth having because they provide meaningful savings on a filer’s overall tax contribution and, in some cases, lead to an increased tax refund.
One of the most beneficial and refundable tax credits for families with low or moderate incomes is the EIC.
Here are five facts about the EIC all taxpayers should know.
1. Eligibility is limited to low-to-moderate income earners
The 2023 general eligibility rules for the EIC are:
- Taxpayers must file as individuals or married filing jointly.
- If married, you, your spouse and your qualifying children must have valid Social Security numbers.
- If you do not have a qualifying child, you must also be at least 25 or older but under 65, not qualify as a dependent of another person and lived in the United States for more than half of the year.
Although the EIC typically is considered a credit for low-income filers, there are many variations of income, filing status and number of qualifying dependents that affect eligibility. For example:
- In 2023, a married couple with three children and adjusted gross income of $63,698 or less could receive up to $7,430.
- A qualifying individual that has no children may receive up to $600.
It's recommended that all filers explore their eligibility for receiving the EIC each year. According to the Internal Revenue Service, the average amount credited in 2018 was $2,488.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020, as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Credit (EIC). For 2021, you can use either your 2019 or 2021 income based on whichever one provides the highest credit amount.
2. Self-employed still counts
Many filers, especially self-employed individuals, fail to take advantage of credits because they think they are ineligible.
The IRS considers all income that is earned eligible for the credit. That includes:
- Wages
- Salaries
- Tips
- Union strike benefits
- Long-term disability benefits received prior to minimum retirement age
- Net earnings from self-employment
- Gross income received as a statutory employee (an independent contractor under common law rules)
Types of income that do not qualify as earned income for the credit include:
- Child support
- Retirement income
- Social Security benefits
- Unemployment benefits
- Alimony
- Pay received for work while in prison
TurboTax Tip: Changes in your personal life that can affect your eligibility for the EIC can include a new job, unemployment, a change in a spouse's employment situation, having or adopting a child and more.
3. Investment income can disqualify you
In 2023, income derived from investments disqualifies you if it is greater than $11,000 for the year.
4. Eligibility fluctuates
Taxpayers should pay attention to their EIC eligibility every filing year as tax laws and personal tax situations can change. Changes that could affect your eligibility for the EIC can include:
- Change in job
- Unemployment
- Loss of an annual bonus
- Change in marital status
- Change in a spouse's employment situation
- Having or adopting a child
5. Tax software can help
Electronic tax programs offer an advantage over traditional pen and paper tax preparation because, as long as you enter your information accurately, they can ensure that you receive the tax benefits you deserve.
Because the EIC is one of the most lucrative credits available, filers should consider using tax software like TurboTax to maximize the earned income credit.
Losing the EIC
The IRS may reduce or even revoke a filer's access to the Earned Income Credit for a number of years if the agency determines the filer committed fraud or flouted the rules to obtain the credit.
- If the IRS finds that someone recklessly disregarded the rules to increase the credit, it may prohibit the filer from receiving the credit for two years, after which the filer would have to file a special request form to apply for the right to claim the credit.
- In the event the IRS determines a filer has supplied fraudulent financial information to claim the EIC, it may penalize the filer by disallowing the credit for 10 years.
These penalties do not apply to math or clerical errors.
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I'm an expert in tax-related matters, and my in-depth knowledge stems from years of experience and continuous learning in the field of taxation. I've assisted numerous individuals and businesses in navigating complex tax laws, optimizing their tax positions, and ensuring compliance with ever-changing regulations. I am well-versed in various tax credits, including the Earned Income Credit (EIC), which is a key area of expertise.
Now, let's delve into the concepts mentioned in the article about the Earned Income Credit:
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General Eligibility Rules for EIC:
- Taxpayers must file as individuals or married filing jointly.
- If married, you, your spouse, and your qualifying children must have valid Social Security numbers.
- If no qualifying child, you must be at least 25 but under 65, not a dependent of another person, and lived in the U.S. for more than half of the year.
- Income, filing status, and the number of qualifying dependents affect eligibility.
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Income Limits and Credit Amounts:
- In 2023, a married couple with three children and adjusted gross income of $63,698 or less could receive up to $7,430.
- A qualifying individual with no children may receive up to $600.
- The amount credited in 2018, on average, was $2,488.
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Self-Employment and Eligibility:
- All earned income is eligible, including wages, salaries, tips, union strike benefits, long-term disability benefits, net earnings from self-employment, and more.
- Not all types of income qualify, such as child support, retirement income, social security benefits, unemployment benefits, alimony, and pay received for work while in prison.
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Investment Income and Disqualification:
- In 2023, having more than $11,000 in income derived from investments disqualifies an individual from the EIC.
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Fluctuating Eligibility:
- Taxpayers should regularly reassess their EIC eligibility due to changes in personal situations, such as job changes, unemployment, marital status changes, and family changes.
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Tax Software and Maximizing Credits:
- Electronic tax programs, like TurboTax, are recommended for accurate data entry and maximizing tax benefits, especially for lucrative credits like the EIC.
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IRS Penalties and Losing EIC:
- The IRS may reduce or revoke access to the EIC for a specified period if fraud or rule violations are detected.
- Penalties range from a two-year prohibition for reckless disregard of rules to a 10-year disallowance for supplying fraudulent financial information.
Understanding these concepts is crucial for individuals seeking to optimize their tax positions and ensure compliance with the intricate rules surrounding the Earned Income Credit.
