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How the Earned Income Tax Credit Works

By: Dave Roos  | 

How to Claim the Earned Income Tax Credit

Reading the instructions that accompany the IRS form 1040 is a mind-numbing experience. But before you despair, let's clear up the confusion over claiming the Earned Income Tax Credit on your income tax return.

As we mentioned earlier, you have to file an income tax return to qualify for the EITC, even if you don't make enough money to owe federal income tax. Line 27 of form 1040 is called "Earned Income Credit (EIC)." That's where you're supposed to enter the amount of your credit, but there are no instructions on the 1040 form itself. That information is found in the lengthy 1040 instruction booklet that you can download here from the Internal Revenue Service.

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Jump to page 40 of the 1040 instruction booklet to find information about the EITC. The booklet contains a six-step process for figuring out if you qualify for the credit, how to calculate earned income and how much you can claim in EITC. Step one contains a list of questions designed to weed out people who don't qualify, either because they earn too much money, don't have a Social Security number, have foreign earned income or are married but filing separately.

Step two uses information from your 1040 to figure out how much you earn in investment income. If that number is greater than $3,650, you don't qualify. Step three helps you determine if you have a "qualifying child" under the EITC rules. Step four is for those who are claiming the EITC without a qualifying child. The questions in this step check your income level, age, and U.S. residency status.

Step five is for those claiming the EITC with a qualifying child. This step helps you determine your earned income. If you are self-employed, the instructions tell you to jump to Worksheet B to determine your EITC. If you earned wage, salary and tip income as an employee of someone else, then you have a choice. You can have the IRS figure out your EITC or you can complete Worksheet A and do it yourself. If you want the IRS to do the math for you, simply write "EIC" on the dotted line next to line 27 on form 1040. If you're feeling lucky, proceed to Worksheet A.

Worksheet A helps you decide whether to use the earned income amount you calculated in step five or your adjusted gross income (AGI) entered on line 1 of your 1040. When you settle on a number to use, consult the Earned Income Credit Table (also in the instruction booklet) that corresponds to your income level, filing status and family size. That number is the figure you will enter on line 27 of the 1040. If you are self-employed, you will use Worksheet B to determine your earned income number and EITC amount.

One last thing: If you are claiming qualifying children for your EITC, you need to complete and attach Schedule EIC, a separate tax form from the 1040. Still confused? Perhaps this is why 22 percent of eligible taxpayers failed to claim their EITC in 2017 [source: IRS].

Originally Published: Mar 5, 2012

Earned Income Tax Credit FAQ

What does EIC stand for?
The EIC is the Earned Income Credit.
Do I qualify for an earned income tax credit?
The Earned Income Tax Credit is for those who are low- to moderate-income workers with children. In order to qualify, you'll need to: Show proof of earned income. Have investment income that's less than $3,650 in a given year. Have a Social Security number. Be a U.S. citizen or resident alien for the entire year.
What is the minimum income to qualify for the earned income credit?
You need to earn at least $1 in order to qualify.
Can a single person get the earned income credit?
Single taxpayers can qualify for the earned income credit.
How do you file for the Earned Income Tax Credit?
All you have to do to claim the Earned Income Tax Credit is meet the qualifications and file your annual federal tax return.
How much is the earned income credit for 2020?
For the 2020 tax year (which is filed in 2021), the EIC ranges from $538 to $6,660 depending on the number of children you have.

Author's Note: How the Earned Income Tax Credit Works

As a faithful user of TurboTax, I've walked through the qualifying questions for the Earned Income Tax Credit a number of times, but never fully understood what it was I was qualifying (or not qualifying) for. As with any tax credit, I was disappointed to find out that I didn't qualify for any free money, year after year. But now that I understand what the EITC is and who it's for, I'm thankful that I never passed the EITC test. The EITC is rightfully reserved as an emergency credit for those who are truly struggling to stay above the poverty line, and I'm glad to learn that it works. The EITC is the most successful of all government anti-poverty programs. I'm glad I haven't needed it, but I'm also glad to know it's there if I ever do.

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Sources

  • Forman, Jonathan Barry. Tax Policy Center. "Earned income tax credit." http://www.taxpolicycenter.org/taxtopics/encyclopedia/EITC.cfm
  • Internal Revenue Service. "About EITC" http://www.eitc.irs.gov/central/abouteitc/
  • Internal Revenue Service. "About EITC: Basic Qualifications" http://www.eitc.irs.gov/central/abouteitc/basicqualifications/
  • Internal Revenue Service. "Earned Income Tax Credit Q&A" http://www.irs.gov/pub/irs-pdf/p3211esp.pdf
  • Internal Revenue Service. Publication 596. "Earned Income Credit (EIC)." 2011 http://www.irs.gov/pub/irs-pdf/p596.pdf
  • Internal Revenue Service. "The Range of EITC for 2011" http://www.eitc.irs.gov/public/site_files/3056-EITC_2011_Graph_1100x850.jpg
  • Short, Kathleen. U.S. Census Bureau. "The Research Supplemental Poverty Measure 2010." November 2011 http://www.census.gov/prod/2011pubs/p60-241.pdf
  • Tax Policy Center. "Taxation and the family: What is the Earned Income Tax Credit?" http://www.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfm
  • Tax Policy Center. "Taxes and the poor: How do refundable and nonrefundable credits differ?" http://www.taxpolicycenter.org/briefing-book/key-elements/poor/credits.cfm