Tax Guide

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Qualifying for the Earned Income Credit

One of the most popular tax credits is the Earned Income Tax Credit. This refundable income tax credit is targeted at low- to moderate-income working individuals and families. Approved by Congress in 1975, the EITC (often called just EIC) was seen as a way to offset the burden of Social Security taxes and to provide an incentive to work.

The EIC is a refundable credit, meaning it can give you a tax refund if you qualify – even if you don’t owe any tax. But you do have to file a tax return to get the credit, plus meet certain requirements.

Step One – Earned Income

You need earned income to qualify for the Earned Income Tax Credit. Apparently some folks have the mistaken idea that they can apply for the EIC when they have no income, earned or otherwise. Not so.

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

So if your only source of income is listed above, you cannot claim the EIC.

Taxable earned income that does qualify for the EIC 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 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.

Also, if you make more than a certain income limit, you won’t qualify. For tax year 2016, 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, or you're disqualified.

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.

Step Two – Rules of the Game

If you pass the income test, there are other requirements you must satisfy before being deemed eligible for the EIC.

First, 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.

infographic on EICIf you’re a member of the American Armed Forces, serving in a combat zone, some special rules apply.

All this may sound a little complex, but it's simple to figure EIC on your 1040.com return. In fact, you probably won't have to do anything to get the credit: If you have earned income and qualify, the credit should just appear on your return.

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