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How the Earned Income Tax Credit Works

By: Dave Roos  | 

The Earned Income Tax Credit is a tax credit available to working American families with low incomes. Thomas Barwick/Getty Images

The next time you find yourself bemoaning your tax burden or the size of your refund (or lack thereof), ask yourself one question: Do I qualify for the Earned Income Tax Credit?

The Earned Income Tax Credit (EITC) is a tax credit available to working Americans with low incomes. It is specifically designed to keep individuals and families out of poverty while encouraging people to work. And it works! In 2018, the EITC was credited with lifting 5.6 million Americans above the poverty line including 3 million children [source: CBPP]. In 2020, about 25 million Americans received an EITC for a total of $62 billion [source: IRS]. But not everyone who qualifies for the EITC claims this important credit, potentially leaving thousands of dollars in free money on the table.

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To qualify for the EITC, you have to earn relatively little money for the size of your family. For the 2020 tax year, the maximum you can report in earned income is $56,844 if married and filing jointly or $43,998 if filing individually — and that's only if you have three or more children. The income limit decreases if you have fewer children or no children to support. If you are single with no children, you have to make less than $15,820 to receive the EITC [source: IRS].

The EITC was created by the Tax Reduction Act of 1975. From the beginning, it was designed to benefit low-income families with children by offering a fully refundable tax credit. What does it mean to be fully refundable? Like the Child Tax Credit, the EITC can reduce a taxpayer's tax liability to below zero, resulting in a refund [source: Tax Policy Center]. And if you owe no income tax at all — which is true for many low-earning households — then you get to keep the full amount of the EITC. Unlike other so-called "welfare" programs, the EITC encourages work by requiring some level of earned income. In fact, the amount of the credit increases with income to a certain level, after which it begins to decrease or "phase out." For example, if you're a married couple with three children, you'll receive the maximum tax credit if you earned between $15,000 and $25,000 in 2020. For every dollar you earned over $25,000, your tax credit will decrease [source: IRS].

As with any IRS program, the EITC comes with a long list of complicated rules, restrictions and rate tables. To clear up some of the confusion, we'll start by explaining exactly who qualifies for the EITC and who does not.