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Earned Income Tax Credits

In the United States, Earned Income Tax Credits (EITCs) are available for individuals and families who are working but have low 'earned incomes'. EITCs reduce the tax liability of such taxpayers. Moreover, the taxpayers can even get a refund if the EITCs are higher than the tax owed by them. In this article, we try to explain EITCs in detail.

What qualifies as earned income?

As seen above, in order to be eligible for EITCs, taxpayers should have low earned incomes. To define simply, earned income is any income you have received by doing any work. Earned income includes wages, salaries, bonuses, etc. However, if you get advance salary from your employer, this won't qualify as earned income because you have not done any work to 'earn' the income.

How much is the amount of EITCs per taxpayer?

EITCs vary by income and the number of dependents supported by the taxpayer. For 2015, the Earned Income Tax Credit amounts are as follows:

EITCNumber of dependants
$6,242Three or more eligible children
$5,548Two eligible children
$3,359One eligible child
$503No eligible children

For the period between 2009 and 2017, there has been a temporary increase in the EITCs for working families that have three or more dependants. Earlier, the maximum EITC was available for families with two dependents, and any additional dependants didn't make a difference to the EITC amount. However, from the year 2018, the EITCs will go back to their original form (pre-2009), where the benefit will max out at two dependants.

What is the income criteria to qualify for EITCs?

To be eligible for EITCs, the earned income and the adjusted gross income (AGI) of the taxpayer should not exceed the following amounts in 2015.

Number of dependantsIndividual TaxpayersMarried taxpayers filing jointly
Three or more eligible children$47,747$53,267
Two eligible children$44,454$49,974
One eligible child$39,131$44,651
No eligible children$14,820$20,330

This means all individual taxpayers with income below $47,747 and three or more eligible children will qualify for EITCs.

Note that EITCs cannot be claimed by taxpayers who are married but file their returns separately. Taxpayers who are separated from their spouse can claim EITC if their spouse has not lived with them for the past six months of the tax year. Such taxpayers can claim EITCs by filing their return as a Head of Household.

Definition of eligible children:

As seen above, taxpayers can qualify for EITC only if their children are qualified or eligible. In order to qualify, the children should pass four key tests.

  • Relationship test
  • Age test
  • Residency test
  • Joint return test

Relationship test: In order to pass the relationship test of EITC, the child must be related to you in any of the following ways.

  • By birth
  • By marriage
  • Adoption
  • Foster arrangement

A qualifying child can be any of the following.

  • Son
  • Daughter
  • Grandchild
  • Niece
  • Nephew
  • Brother
  • Sister
  • Foster child

For purposes of EITC, adopted children are considered the same as children by birth. In terms of foster children, if an authorized placement agency has put them in your care, you can qualify for EITCs.

Age test:

The age test of EITCs requires the following conditions to be fulfilled.

  • At the end of the tax year, children should be aged 18 or less
  • If the children are full-time students, EITCs can be claimed till they reach the age of 23
  • If a dependant is totally or permanently disabled, there is no age limit for claiming EITCs for such a person

Residency test:

The child should be living with the taxpayer in the United States for over 6 months and 1 day in a year. Also as per the residency test, only one person can claim the EITC for one child.

Joint return test:

If any of your qualifying children file a joint return with their spouse, you can't claim EITCs for such children. The only exception to this rule is if the qualifying children are filing a joint return only for the purposes of claiming a refund, and the couple's joint tax filings are without any deductions and credits.

Apart from these four tests, it is compulsory for the qualifying child to have a valid social security number (SSN). No EITC can be claimed for children without a valid SSN.

Who is eligible for EITCs?

Apart from income and the number of dependants, taxpayers need to meet the following criteria to qualify for Earned Income Tax Credits:

  • The taxpayers need to have valid Social Security Numbers
  • For the full year, the taxpayers should be a US citizen or a resident alien
  • The taxpayers are not using the 'married but filing separately' tax status
  • The taxpayers cannot claim the foreign earned income exclusion, which is available for any wages received when living abroad
  • The taxpayers and their spouses should be aged between 24 and 64

EITCs from State governments

Apart from the federal government, 23 state governments provide taxpayers with their own EITCs. Except Minnesota, all states set EITCs as a percentage of the federal EITCs. However, each state charges a different percentage. Minnesota sets EITCs based on the income of the taxpayers. Similar to Federal EITCs, 20 states provide a refund if the amount of EITCs is higher than the taxes owed by the individuals. In 4 states - Delaware, Maine, Ohio, and Virginia - EITCs can be used to reduce a taxpayer's tax liability, but you cannot claim a refund if EITCs are higher than the tax payable. Apart from the states, District of Columbia also provides EITCs as a percentage of the federal EITCs. Let's look at some examples of state EITCs.

Example 1: Connecticut offers EITCs of 25% of the federal EITC, and the amount is refundable. Maryland offers two EITC options to taxpayers. If they opt for a refundable EITC, they can get up to 25.5 percent of the Federal EITC. Moreover, if they opt for a non-refundable EITC, they can get up to 50% of the Federal EITC. District of Columbia offers a high EITC, which is 40% of the Federal EITCs.

Use our US tax calculator to assess the impact of EITCs on your taxable income.

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