The Ins and Outs of the Earned Income Tax Credit

tax breaks, tax tips | January 27, 2017 | By Susannah McQuitt

The ins and outs of the Earned Income Tax Credit

Here’s a fun fact: Today is Earned Income Tax Credit Awareness Day! It also just so happens to be National Have Fun at Work Day – and what better way to have fun than to spread awareness of a tax credit? Maybe don’t answer that.

So, what exactly is it you’re supposed to be aware of?

What is the EITC?

The EITC is a refundable income tax credit targeted at low- to moderate-income working individuals and families. It can give you a tax refund if you qualify – even if you don’t owe any tax (cha-ching). But you do have to file a tax return to get the credit, plus meet certain requirements.

You must also be a U.S. citizen (or resident alien living in the U.S. all year) with a valid Social Security Number. You can't be filing as married filing separately, and you can’t be considered a qualifying child of another taxpayer.

What counts as earned income?

So what counts as “earned income?”

Captain Obvious coming in hot: You need earned income to qualify for the Earned Income Tax Credit. But what exactly does “earned income” include?

Here are the types of income that do not count as earned income:

  • Interest and dividends
  • Retirement income, including Social Security benefits
  • Unemployment benefits
  • Alimony or child support
  • Pay for work while an inmate in a jail or prison

Taxable earned income that does qualify for the EITC includes:

  • Wages, salaries, tips, and other taxable employee pay
  • Long-term disability payments received prior to minimum retirement age
  • Net earnings from self-employment if you own a business or farm, or if you are a minister or religious order member
  • You may also qualify if you’re a statutory employee with income, or if you’re receiving strike pay as a union benefit.

In short, there are two ways to get earned income: You work for someone who pays you, or you own or run a business or farm.

Balancing the EITC and income

How much income is too much?

Since the EITC is aimed at helping low- to moderate-income taxpayers, it makes sense that you can’t claim the credit if you make more than the income limit. For example, if you don’t have any children, your adjusted gross income (AGI) must be less than $14,880. If you’re married filing jointly, that limit is $20,430 without kids.

The rate tops out at $47,955 (or $53,505 if married filing jointly) if you have three or more qualifying children. In all cases, investment income must be less than $3,400 for the year.

If you’re not sure whether your wage situation qualifies for the Earned Income Tax Credit, check IRS Publication 4935, Guide to Earned Income Tax Credit.

For more details, take a look at our Earned Income Credit infographic.

Buffering refund if your return includes the EITC

The EITC may delay your refund

Now, here’s an important note: If you do claim the EITC on your tax return, your federal refund won’t be processed until at least February 15, 2017, because of provisions of the Protecting Americans from Tax Hikes Act (also known as the PATH Act).

As for your state refund, the EITC will affect each state differently – and some quite a bit. Not sure where your state falls in the mix? Check out what we found out about delayed state refunds.

But let’s be real: At the end of the day, it’s worth so much more to wait a little longer to get your refund than to run the risk of having that money – or even your identity – stolen through tax fraud. And the EITC is definitely worth the wait!

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