The Earned Income Tax Credit Isn't Just for the Poor

Don't think you'd qualify for the Earned Income Tax Credit? Look again, especially if you have children living with you.

Mar 30, 2014 at 9:47AM

The Earned Income Tax Credit has long been an incentive for lower-income families to work and earn income. Qualifying taxpayers can receive the credit and get cash back, even if they did not pay estimated taxes or have income tax withheld from their pay.

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Source: The Motley Fool.

The amount of this credit is not a meager amount, either. The maximum credit in 2013 is $6,044, based on a married couple with three or more qualifying children living with them.

You may qualify for at least some credit if your adjusted gross income is less than $51,567 and you are married filing jointly, with three or more qualifying children. If you file jointly and have two children, you can have an adjusted gross income of up to $48,378 before your EITC is phased out.

How it works
The amount of EITC for which you may qualify depends on how much you earn, how many children you have living with you, your filing status, and your total adjusted gross income.

At the lower end of the scale, the more you earn, the more credit you receive. This feature is intended to encourage taxpayers to work, at an income level where they're not making much more money than they would receive in benefits if they were not working.

After you reach a certain point, depending on whether you are married and how many children live with you, the credit declines until it is zero.

Who can claim the credit?
For the 2013 tax season, you may qualify for the EITC if all of the following are true:

  • You, your spouse if you file jointly, and your children have Social Security numbers that are valid for employment.
  • You have earned income, either as an employee or as a self-employed person.
  • You do not use the Married Filing Separately filing status.
  • You are a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
  • You are not a qualifying child of another person for the EITC.
  • You do not file Form 2555 or Form 2555 EZ because you have foreign earned income.
  • You do not have more than $3,300 in investment income, such as interest and dividends.
  • You have at least one qualifying child, or if you do not have a qualifying child, you are at least age 25 but under age 65 at the end of the year, you live in the United States for more than half the year, and you do not qualify as a dependent of another person.
  • Your earned income and adjusted gross income are under these limits:
Children Living with You  Maximum Adjusted Gross Income and Earned Income 
 0  $14,340 ($19,680 married filing jointly)
 1   $37,870 ($43,210 married filing jointly)
 2   $43,038 ($48,378 married filing jointly)
3+  $46,227 ($51,567 married filing jointly)

You must file a tax return to claim the EITC, even if you would not otherwise be required to file.

Special rules for the military
If you are a member of the armed forces, you do not have to include combat pay in your taxable income. If you may qualify for the EITC, however, excluding income from pay would cost you part of your credit. You may actually be better off with the taxable income.

Fortunately, a special rule prevents you from losing this tax break. For purposes of the EITC, you can choose to include your combat pay in your taxable income. You must either include all your pay or none in taxable income.

Claim all qualifying children who live with you
The amount of EITC you receive, or whether you qualify for any of this credit at all, depends on how many children you claim for the credit. It is very important that you claim all the children to whom you are entitled to receive your maximum credit.

A major point of confusion is the difference between children you claim as dependents and children who qualify you for the EITC. They are not the same. A child for the EITC must live with you for more than half of the year. It's common for a noncustodial parent to claim a child as a dependent if he or she pays more than half of the child's support. However, a noncustodial parent can never claim a child for purposes of the EITC.

A qualifying child for the EITC must meet all four of these tests:

  • Age. The child must be under age 19 at the end of the year, or a full-time student under age 24. There is an exception if the child is permanently and totally disabled; in that case, the child can be any age. You cannot claim a child for the EITC that is not younger than you or your spouse.
  • Relationship. Your son or daughter is not the only child who can qualify you for the EITC. For this purpose, a "child" can be your son, daughter, stepchild, brother, sister, half-sibling, step-sibling, or a descendent of any of these. A qualifying foster or adopted child is treated as your own child.
  • Residency. The child must have lived with you in the United States for more than half the year. If you file a joint return, include time lived with your spouse.
  • Joint return. The child must not have filed a joint return with his or her spouse, unless it was only filed to claim a refund and the child was not required to file.

Looking into the Earned Income Tax Credit can be well worth your time. If you qualify, a refund of up to several thousand dollars can make a big difference in your total financial picture.

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