As its name indicates, the Earned Income Tax Credit (EITC) is largely based on the amount of income you earn in a tax year. Earned income, as defined by the IRS, includes all wages, salary and tips from a job, self-employment or your own business. Earned income also includes other taxable forms of income, like Social Security benefits, unemployment benefits, union strike benefits and long-term disability benefits if you are under age 65. Earned income does not include non-taxable income like alimony, child support or Temporary Assistance for Needy Families (TANF) [source: Internal Revenue Service].
The EITC is designed to help low-income working families stay above the poverty line. For that reason, there is a limit to how much money you can make and still qualify for the credit. For the 2011 tax year, the income limit starts at $13,366 for single, head of household or qualifying widow(er) filers with no children and increases for married couple and families with one or more children. The very highest income limit is $49,078 for a married couple with three or more children. For as detailed breakdown, consult the table below:
The third column of the income limit table indicates the "range of EITC," which is pretty wide, even within the same family size and filing status. To explain how this works, refer to the graph below created by the IRS. The amount of your EITC increases as your earned income increases up to a certain level. For every dollar you earn above that peak level, the amount of your EITC decreases until you reach the income limit for your filing status and family size. For that reason, a married couple with three children that earns $49,078 gets only $11 in EITC, while a similar family that earns $15,000 will receive $5,751 in EITC. The greater the need, the larger the credit.
Finally, let's find out exactly how to claim the EITC on your tax return.