Earned Income Tax Credit: 5 Things You Must Know

Learn the basics of how you can save on taxes with the earned income tax credit.

Aug 5, 2014 at 2:10PM

Tax John Morgan Flickr
Source: John Morgan via Flickr.

No one likes to pay taxes, but few people ever expect that the Internal Revenue Service will cut them a check. Yet that's exactly what the Earned Income Tax Credit does for many Americans. The credit is one of the only tax breaks that can actually result in refund checks from the federal government, even if you have no income tax liability. More than 27 million taxpayers received the Earned Income Tax Credit in the most recent year for which IRS data is available. Let's take a closer look at the Earned Income Tax Credit to give you more information on whether you qualify and what you need to know to get the benefit of the credit.

1. You must file a tax return to claim the Earned Income Tax Credit
In order to get the benefit of the credit, you need to file a tax return. Spaces are available on all the primary return forms -- including the full 1040, the 1040A, and the compact 1040EZ -- to claim the credit. Until 2010, taxpayers could have their Earned Income Tax Credit payments added to their paychecks throughout the course of the year by filing the appropriate W-4 withholding forms with their employer. But lawmakers repealed that provision, effectively requiring taxpayers to wait until tax-filing time to receive their EITC payments.

2. Households of any size can claim the Earned Income Tax Credit
When it was first instituted, the Earned Income Tax Credit applied only to taxpayers with qualifying children. But over time, the program was successful enough in meeting its goals that lawmakers expanded the credit to cover those without children as well. Admittedly, the child-focused goals of the credit are still evident in the amounts it offers, as the maximum credit for those without children is under $500, or less than a tenth of what those with two or more children can receive.

3. The Earned Income Tax Credit is a huge benefit to many taxpayers
In total, taxpayers received more than $63 billion in Earned Income Tax Credit payments in 2012, according to the IRS. As you can see below, certain families can receive $6,000 or more in EITC payments in any given year.

Number of Qualifying Children

Maximum Earned Income

Maximum EITC

3 or more

$46,997 ($52,427 for joint filers)



$43,756 ($49,186 joint)



$38,511 ($43,941 joint)



$14,590 ($20,020 joint)


Source: IRS.

Credit amounts climb gradually for every dollar earned through work up to the maximum amount. Then, above a higher limit, the credit begins to phase out, resulting in smaller EITC payments as income increases until the EITC disappears entirely.

Number of Qualifying Children

Income at Which Credit Is Maximized

Income at Which Phaseout Begins

Credit as % of Qualifying Income

Rate at Which Credit Phases Out

3 or more


$17,830 ($23,260 for joint filers)





$17,830 ($23,260 joint)





$17,830 ($23,260 joint)





$8,110 ($13,540 joint)



Source: Tax Policy Center.

Uncle Sam Wikimedia

Source: Wikimedia Commons.

4. The Earned Income Tax Credit is a policy tool to fight poverty
The IRS doesn't hesitate to share the positive impact of the Earned Income Tax Credit on low-income taxpayers. According to its most recent data, the credit was instrumental in pulling 6.5 million people above the poverty line, with about half of those people being children. According to figures from the Tax Policy Center, the Earned Income Tax Credit program is the second-largest assistance program aimed at low-income households, behind only the Supplemental Nutritional Assistance Program.

5. States have climbed onto the EITC bandwagon
In addition to the federal tax credit, half of all states in the U.S. have a state-tax version of the Earned Income Tax Credit. In most cases, states simply take a percentage of the federal credit and use it to offset any state tax liability. The vast majority of those states allow recipients with no state tax liability to receive a refund as a result of their EITC eligibility. The Center on Budget and Policy Priorities has a helpful map of states with EITC provisions.

The Earned Income Tax Credit has its critics, with some pointing to confusion about the somewhat complicated rules governing eligibility and calculating the amount of the credit. Others note that couples filing joint returns can have their EITC payment eligibility reduced substantially or even eliminated, creating a disincentive for marriage. Yet given the effectiveness with which the EITC has provided low-income workers with much-needed money to supplement their earnings, the credit will continue to play a vital role in the federal government's fight against poverty. Those eligible to receive the Earned Income Tax Credit should therefore take full advantage of their benefits.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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