What Is the Earned Income Tax Credit?

The Earned Income Tax Credit, or EITC, is a tax credit offered by the federal government that is designed to provide financial relief to low and moderate-income households. It was designed to help offset Social Security taxes for lower-income workers by providing additional income.

The EITC is one of the most valuable tax credits in the U.S. tax code and can provide more than $7,000 for large families. For the 2022 tax year, 31 million people received the EITC, with an average credit amount of more than $2,000.

In this article, we'll discuss the eligibility requirements for the EITC, how much it can be worth for you, how to claim the EITC when you file your taxes, and other important information you need to know.

Who is eligible for the EITC?

In order to qualify for the EITC, you must have income. And as the name of the credit implies, it must be earned income from a job or a business in which you actively participate.

Eligibility for EITC depends on your household income and the number of qualifying children you have. For the 2023 tax year, here are the EITC income limits for different tax filing statuses and numbers of qualifying children in the household. (Note: The 2024 limits have not been announced as of this writing, but will likely rise due to inflation.)

One key takeaway from the chart is that while you don't necessarily need to have children to get the EITC, the income limits are much lower for those who don't have any qualifying children. If you don't have children, you must be between 25 and 65 years old, and you can't be claimed as a dependent on someone else's tax return.

In addition to a qualifying income, you'll also need to have a Social Security number and be a citizen or resident alien. Also, no more than $11,000 of your income can be from investments.

How tax credits work

There are two main types of tax breaks in the United States tax code -- deductions and credits. Tax deductions reduce the amount of income you pay tax on, so if you earn $100,000 and have $20,000 worth of deductions, the IRS will apply the tax brackets to $80,000 of your income.

On the other hand, tax credits reduce the amount of tax you owe dollar for dollar. If your income tax for 2024 is $7,000 and you have a $2,000 tax credit, it would reduce your tax to $5,000.

Some tax credits are nonrefundable, meaning that they can reduce your tax liability to zero, but not beyond that. In other words, if your tax liability for the year is $1,700 and you have a $2,000 tax credit, you wouldn't get the additional $300 back.

A refundable tax credit is one that can be given, even if it reduces your tax liability to zero. The Earned Income Tax Credit is a refundable tax credit, so it can be paid to you even if no taxes are owed for the year.

How much is the Earned Income Tax Credit?

The maximum amount of the EITC depends on how many qualifying children you have. Here are the maximums for the 2023 and 2024 tax years:

Note that these are maximum credit amounts. The exact credit you'll get depends on your income. It's a bit of a complicated structure, but the short version is that the credit phases in for low incomes, peaks at a certain part of the income range, and then phases out as incomes approach the limits discussed earlier. Technically speaking, the credit is paid as a percentage of earned income until the maximum credit is reached and begins to phase out at a specific rate for incomes above a certain level.

As an example, let's say that you are married filing jointly and have two qualifying children. For 2023, the maximum credit of $6,604 is paid to couples with earned income in the $16,510 to $28,120 range and is lower the further away you get from that range.

It's also worth noting that 31 states and Washington D.C. have their own Earned Income Tax Credits that are usually based on a percentage of the EITC. So, you could end up getting an even larger tax benefit than this chart shows, depending on where you live.

How do you claim the EITC?

To claim the EITC, you'll need to file a Form 1040 (Federal Income Tax Return), and you'll also need to include a Schedule EIC if you're claiming any children. The good news is that if you file your return electronically using tax prep software, this will likely be done automatically.

It's also worth noting that the EITC is one of the biggest reasons why your tax refund might be delayed. Since the EITC can be a relatively large tax credit, that also makes it vulnerable to fraudulent claims, so the IRS tends to give it a bit more scrutiny compared with other tax breaks.

The bottom line on the Earned Income Tax Credit

The Earned Income Tax Credit is one of the most popular, and most valuable tax breaks available to U.S. households. If you qualify, the EITC could potentially be worth thousands of dollars each year. Most tax software programs will help walk you through claiming the credit, and although it could cause a slight delay in your refund, it can provide a significant amount of tax relief.