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Earned Income Credit

Updated for Tax Year 2016


OVERVIEW

While millions of households already claim this special break for workers with modest incomes, the IRS says many more are eligible for the credit but fail to take it. The rules were recently liberalized, so more households are eligible. Take a few minutes to make sure you don't miss out on a credit that could bring you a refund check.


Can I take the Earned Income Tax Credit?

If you were married filing jointly and earned less than $53,505 ($47,955 for individuals, surviving spouses or heads of household) in 2016, you may qualify for this tax credit, or even for a refund check. It's complicated, but the Earned Income Tax Credit (EITC) is worth exploring if you or someone you know has modest earnings.

  • The credit reduces any federal income tax you owe, dollar-for-dollar.
  • If the credit completely eliminates your tax bill, and some credit is still left over, you can actually get a cash refund for the remaining  amount.

To help you find out if you qualify, TurboTax asks simple questions so you can get the largest possible credit.

Tests for qualifying

First you have to qualify. Then your income has to be within stated limits. Finally, if you have one or more kids, they have to qualify too for you to receive a larger credit. If you pass all these tests, you could get a credit of as much as $6,269 for 2016 depending on your income and the number of children you have.

Once you determine that you qualify for the credit, use the Earned Income Credit table found in the instructions for Form 1040 (or Forms 1040A or 1040EZ) to look up your income and find out the amount of credit you're entitled to.

You qualify if:

  • You have income from earnings (for example, from a job, your own business, union strike benefits, certain long-term disability benefits).
  • You did not receive more than $3,400 in interest or dividends, or income from rentals, royalties or stock and other asset sales during 2016.
  • You are single or, if married, do not use the Married Filing Separate status.
  • You, your spouse and children, if applicable, all have Social Security numbers.
  • You and your spouse are not being considered as a child on someone else's tax return for purposes of the earned income credit.
  • You are not excluding any income you earned in a foreign country on your return.
  • You are a citizen or resident of the United States.
  • You have dependents.
  • You do not have a qualifying child, but you and your spouse are between 25 and 65, not the dependents of anyone else, and you have lived in the United States for more than half of the year.

How much can I earn and still qualify?

This credit is targeted at households with modest incomes, so if you earn "too much" you may not qualify. Just how much can you earn and still qualify? It depends on how many qualifying children you have (we'll define this in a moment). Those with the lowest income qualify for the biggest credits. Those with incomes above the phase-out threshold qualify for lower credits until they reach the point where the credit is eliminated completely. The rules have been liberalized to result in higher credits for many households, especially those with three or more qualifying children. The following table shows the 2016 income limits for receiving credits and the maximum 2016 credit amounts.

If you have:

Your earned income(and adjusted gross income)must be less than:

Your maximum                     credit will be:

No qualifying children

$14,880 ($20,430 if married and filing a joint return)

$506

1 qualifying child

$39,296 ($44,846 if married and filing a joint return)

$3,373

2 or more qualifying children

$44,648 ($50,198 if married and filing a joint return)

$5,572
3 or more qualifying children $47,955 ($53,505 if married and filing a joint return)

$6,269

 

Does my child qualify?

To qualify, the child must be:

  • Your son, daughter, stepchild, adopted child or a descendant.
  • Your foster child, placed with you by an authorized agency or court order.
  • Your brother, sister, stepbrother, stepsister or a descendant of one of these.
  • Age 18 or younger as of the end of the year (unless he or she is a full-time student, in which case the student must be 23 or younger). Exception: A person who is permanently and totally disabled at any time during the year qualifies, no matter how old.
  • A resident with you in the United States for more than half of the year.

Example:

You and your sister live together. You are 30 and your sister is 15. When your parents died two years ago, you took over the care of your sister, but you did not adopt her. She is considered a qualifying child because she lived with you more than half of the year.

Who is an eligible foster child?

For the Earned Income Credit, a foster child is defined as an individual who is placed with you by an authorized placement agency or court order. The child must have lived with you for more than half of the year.

What about my welfare benefits?

The Earned Income Tax Credit has no effect on certain welfare benefits. Any refund you receive because of the EITC will not be considered income when determining whether you are eligible for, or how much you can receive from, the following benefit programs:

  • Temporary Assistance for Needy Families (TANF)
  • Medicaid and Supplemental Security Income (SSI)
  • Food stamps
  • Low-income housing

For more information on whether you qualify for the credit, use the TurboTax program. An overview is also available in Publication 962: Possible Federal Tax Refund Due to the Earned Income Credit.

For complete details, see IRS Publication 596: Earned Income Tax Credit (EITC).

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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