The earned income credit is a benefit for those who are working and have low to moderate incomes. To qualify you must file an income tax return. Here is a look at the rules surrounding this credit and the requirements for claiming it.
What Is the Earned Income Credit?
The earned income credit (EIC) is a tax credit available to low to moderate-income taxpayers. The credit can be worth up to $6,557 for 2019 and up to $6,660 for 2020. A tax credit is better than a tax deduction in that the credit is a direct reduction in the amount of tax owed.
The EIC was implemented to offset the impact of Social Security taxes on low to moderate-income taxpayers and to provide them with an incentive to work.
Do I Qualify for the Earned Income Credit?
To qualify for the earned income credit:
- You must file as single or married filing jointly. You cannot file as married filing separately.
- You must have earned income for employment or self-employment.
- You cannot earn over a certain amount of investment income for the year. For 2019 this amount is $3,600, for 2020 the amount is $3,650.
- You cannot file a form 2555 for foreign-earned income or form 2555-EZ for foreign income exclusion.
- Note there are special rules for members of the clergy or the military, as well as for those with certain disabilities or who have children with certain disabilities.
For the tax year 2020, the adjusted gross income limits to claim the credit are:
Source: Internal Revenue Service
The maximum credit amounts for 2020 are:
- $6,660 with three or more qualifying children
- $5,920 with two qualifying children
- $3,584 with one qualifying child
- $538 with no qualifying children
For information about the 2019 earned income credit limits and related information, please check out IRS Publication 596.
The rules for qualifying children and the earned income credit are:
- They must have a valid Social Security number.
- The relationship must be with a child, a stepchild, an adopted child or a grandchild if they are the children of any of these children.
- They can also be a sibling, half-sibling, step-sibling, or a descendant of any of these, such as a niece or nephew.
- At the end of the filing year, the child must be younger than you (or your spouse if filing jointly) and under the age of 19. The age limit is 24 if they are full-time students.
- If the child was permanently and disabled at the end of the filing year, there are no age limits.
- The child must live with you (or your spouse) in the U.S. for at least half of the year.
- Only one person can claim the child. These rules are complex and if this applies to your situation be sure to check out the IRS rules for this situation.
How to File for the Earned Income Credit
To claim the earned income credit, you must file a federal income tax return. You must file Schedule EIC and include it with your federal return. That schedule asks for the qualifying child's information if you are claiming one.
The steps to figuring your earned income credit for 2019 begin on page 38 of the instructions for form 1040. You will need to go through the worksheets and then enter the result on the new, abbreviated 1040 form.
Before embarking on this, the IRS suggests that you have the following information ready:
- Social Security information/verification for any persons claimed on the return.
- The dates of birth for all persons who will be listed on the return.
- Copies of your prior year's federal and state returns.
- Statements for all types of income received such as 1099s, W-2s, Social Security, unemployment, investment income, self-employment income and other sources as applicable.
- All records of expenses such as mortgage interest, real estate taxes paid, plus any records of your business expenses if you run a business.
- All 1095 forms (A, B or C) about health insurance.
- Bank information to facilitate the direct deposit of any tax refund.
- Information about any dependent child care expenses you may have incurred.
If the earned income credit was denied in previous tax years you can submit Form 8862 with this tax return asking the IRS to relook at this. You can also file for the earned income credit on prior years' returns if you have not filed them.
If you think you are eligible for the earned income credit it behooves you to get your information together and complete the worksheets. What do you have to lose?