Earned Income Tax Credit
Find out what the Earned Income Credit is, and see if you can take advantage of this valuable tax credit.
The earned income credit (EIC) is designed to help low-income workers continue working by reducing their income tax liability. As long as your income is below certain amounts and you meet certain other tests, you may qualify for this credit. Plus, the EIC is a refundable credit, meaning that once your tax gets down to $0, you get the rest of the credit refunded to you! For 2006, that means you could get an extra $412 if you don't have any qualifying children, $2,747 if you have one qualifying child, or $4,536 if you have more than one qualifying child - just for filing a tax return.
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Know the Requirements
The tests to determine whether you qualify for EIC depend on whether you have one or more qualifying children. However, everyone must meet certain tests:
You must file a tax return, and your filing status can't be married filing separately.
You must have a valid social security number.
You must be a U.S. citizen or resident alien for the entire year
You must have earned income (income you performed services for).
If you have investments, your income from them can't be more than $2,800 in 2006.
You can't file Form 2555 or 2555-EZ to exclude foreign source income.
Your earned income and adjusted gross income in 2006 must be less than $12,120 if you have no qualifying children ($14,120 married filing jointly), $32,001 if you have one qualifying child ($34,001 married filing jointly), or $36,348 if you have more than one qualifying child ($38,348 married filing jointly).
The taxpayer (or spouse if married) cannot be the qualifying child of another person.
Do You Have Qualifying Children?
A qualifying child is one who meets these tests: relationship, age, and residency.
Relationship: The child must be your son or daughter, grandchild, adopted child, stepchild, or eligible foster child. (To be an eligible foster child, the child must have been placed with you by a qualified placement agency, or by judgment, decree, or other order of any court of competent jurisdiction.) The child does not have to be your dependent unless he or she is married. (A married child must be your dependent unless you are divorced or separated and have given up the right to claim the child as a dependent to the other parent.)
Age: The child must be under 19 at the end of the year unless he or she is a full-time student or permanently and totally disabled. Full-time students for at least five months of the year must be under the age of 24; permanently and totally disabled individuals may be any age.
Residency: The child must have lived with you in your United States home for more than six months of the year. (Members of the U.S. armed forces who are out of the country on extended active duty are considered to live in the United States.) Time away for temporary absences (for example, attending college) counts as time living with you. A child who was born or died during the year meets the residency test as long as he or she lived with you the entire time he or she was alive. Also, the child must have a social security number that is valid for employment in the U.S.
Tests You Must Meet if You Don't Have a Qualifying Child
If you meet the "everyone" tests but don't have a child who meets the relationship, age, and residency tests, you must meet all of the following conditions to claim the EIC:
You must be at least 25 and under 65 at the end of the year.
You do not qualify as a dependent of another person.
You must have lived in the United States for more than half the year.
The Advance EIC
If you have at least one qualifying child and expect to qualify for the EIC, the advance EIC allows you to receive part of the credit in each paycheck during the year you qualify for the credit. The maximum Advance Earned Income Tax Credit for tax year 2007 an employer can provide throughout the year with your pay is $1,712.
Is It Worth It?
There are a lot of tests to meet to claim EIC. But yes, it's worth the work. Remember, it's refundable, meaning you can get money even if you don't owe any tax!
New for 2007
The maximum amount of income you can earn and still get the EIC is higher than it was for 2006, and the maximum amount of investment income you can have to qualify in 2007 also went up, to $2,900.
Still need help understanding EIC?
The IRS created a new, user-friendly tool that will help make determining eligibility for the EIC much easier. The new tool, the EIC Assistant, is available in both English and Spanish.
And of course, you can always check with your tax professional for more information.
The American Reinvestment and Recovery Act of 2009
Sec 1002 - Two-Year Increase in Earned Income Tax Credit
For 2009 and 2010, taxpayers that have three or more qualifying children and qualify for the EITC will receive a higher EITC.
Example:
Assume a taxpayer earns $15,000 and has three children. This taxpayer will receive EITC of $5,657. The EITC for two or more children will be $5,028. This represents an increase of $629 in 2009.
For tax years 2009 and 2010, there will be an additional EITC range for taxpayers with three or more qualifying children. Currently the maximum amount of EITC for taxpayers with two or more children is 40% of the first $12,570 (2009 amount) of earned income or $5028. The change will provide allow a maximum EITC amount for families with three or more qualifying children a maximum amount of45% of the first $12,570 of earned income or $5,657. This will be a potential increase of $629 for families with three or more children
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