The earned income tax credit (EITC) is not for every taxpayer. As your income increases, the credit is reduced and it is phased out at an income level. The earned income credit is a refundable tax credit that an eligible individual may claim based on a percentage of the individual’s earned income and the number of dependents who are qualifying children. To qualify for the earned income credit some requirements must be met.
For tax year 2023, taxpayers must have earned income under $63,698 for the tax year. Earned income includes wages, salaries, tips, net earnings from self employment, other employee compensation. Taxpayers investment income must be less than $11,000. Earned income, generally, does not include:
- Alimony
- Child support
- Social Security
- Interest and dividends
- Pensions or annuities
- Unemployment benefits
- Pay you received for work when you were an inmate in a penal institution
It is not accurate when a tax preparer, an advertising material, a family member, a friend, or acquaintance claims that you get a specific amount for your child or children. The amount of the credit is based on the taxpayer’s specific tax and financial situation. The 2023 income limit is:
- 56,838 ($63,698 married filing jointly) with three or more qualifying children.
- $52,918 ($59,478 married filing jointly) with two qualifying children.
- $46,560 ($53,120 married filing jointly) with one qualifying child.
- $17,640 ($24,210 married filing jointly) with no qualifying children.
- Investment income must be $11,000 or less
The children must meet 4 tests: 1) the relationship test: son, daughter, stepchild, adopted child or foster child, brother, sister, half-brother, half-sister, stepsister or stepbrother, grandchild, niece or nephew; 2) the age test: under age 19 at the end of the year, any age and permanently and totally disabled at any time during the year, under age 24 at the end of the year and a full-time student for at least 5 months of the year , 3) the residency test: your child must live in the same home as you in the United States for more than half of the tax year, and 4) the joint return test: If your child can file a joint return with another person, like their husband or wife, you may not be able to claim them.
- $11 to $7,430 with three or more qualifying children
- $10 to $6,604 with two qualifying children
- $9 to $3,995 with one qualifying child
- $4 to $600 with no qualifying children
Taxpayers must be a US Citizen or a resident alien. Each individual in the tax return must have a valid social security number to claim the earned income credit. An individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) may not be used. There are some special rules for military members, clergy members, and taxpayers and their relatives with disabilities.
Taxpayers should be alert by looking for any schedule A, schedule C on their tax return if they are not self-employed and did not receive a Form 1099. Tax returns with schedule A and schedule C face more scrutiny.
The statute of limitations is 3 years for most of the cases where taxpayers illegally claim the EITC.
Statistics from the Internal Revenue Service show that as of December 2023, more than 23 million workers and families received about $57 billion in EITC. The average amount of EITC received nationwide in tax year 2022 was about $2,541. However, the same statistics reveal that many of taxpayers in the category listed below did not take advantage of the earned income tax credit:
- Living in rural areas
- Self-employed
- Receiving certain disability pensions or have children with disabilities
- Without a qualifying child
- Not proficient in English
- Grandparents raising their grandchildren
- Recently divorced, unemployed or experienced other changes to their marital, financial or parental status
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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