The earned income tax credit

A refundable tax credit for low-income and moderate-income taxpayers

Derek Silva

Derek Silva

Published December 17, 2019

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KEY TAKEAWAYS

  • To qualify, your earned income, adjusted gross income (AGI), and investment income need to be within certain limits

  • The EITC is worth between $538 to $6,660 in 2020, up from the 2019 EITC of between $529 and $6,557

  • Claim the credit right on Form 1040 and add Schedule EIC if you have children

  • Tax filers with children benefit most from the EITC

The earned income tax credit is available to taxpayers with low and moderate incomes. The credit decreases the amount of tax you owe and you can get a refund even if your tax liability (what you owe) reaches $0.

You can only qualify for the EITC if you earned income during the year. Your income must also fall within certain income limits. The exact income limits depend on your filing status and how many children you’re claiming. You can get the credit if you don’t have children, but the credit amounts are higher for those with children.

Filing for the earned income tax credit is simple. You calculate the credit right on your Form 1040. Taxpayers with children also have to fill out Schedule EIC, a six-line form where you confirm that your children are actually your dependents.

You will also see the earned income tax credit called the earned income credit, EITC, or EIC. In addition to the federal EITC, your state may offer its own version.

In this article:

Who qualifies for the earned income tax credit

In order to qualify for the earned income tax credit, you must have at least $1 of earned income during the year. Your earned income and adjusted gross income (AGI) also need to fall within certain limits. Your investment income must be $3,650 or less in 2020 (up from $3,600 in 2019). Investments in a retirement account are not included.

You cannot claim the EITC if your filing status is married filing separately. All other filing statuses are eligible. You also do not qualify if you filed Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion). Someone who is a nonresident alien for any part of the year cannot claim the EITC.

You don’t need to claim children in order to get the EITC, but any children you do claim must meet the IRS rules for a qualified child (more on that in a later section). Anyone claiming children must have a Social Security number for each child. If you are not claiming children, you must be between the ages of 25 and 65, you must live in the U.S. for more than half of the year, and you cannot be claimed as a dependent on anyone else’s tax return.

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2020 EITC income limits and maximum credit

# OF QUALIFYING CHILDRENMAXIMUM CREDITINCOME LIMIT: SINGLE, HEAD OF HOUSEHOLD, OR WIDOWEDINCOME LIMIT: FILING JOINTLY
0$538$15,820$21,710
1$3,584$41,756$47,646
2$5,920$47,440$53,330
3 or more$6,660$50,594$56,844

2019 EITC income limits and maximum credit

# OF QUALIFYING CHILDRENMAXIMUM CREDITINCOME LIMIT: SINGLE, HEAD OF HOUSEHOLD, OR WIDOWEDINCOME LIMIT: FILING JOINTLY
0$529$15,570$21,370
1$3,526$41,094$46,884
2$5,828$46,703$52,493
3 or more$6,557$50,162$55,952

What is earned income?

Earned income includes all of the following:

  • Wages, salaries, and tips
  • Union strike benefits
  • Long-term disability benefits you received before your retirement age
  • Net earnings from self-employment if you owned a business or farm, you’re a minister, or you are a statutory employee (your W-2 will tell you whether or not you are)

Some forms of income that do not count as earned income are

Earned income for military members

If you’re a member of the U.S. Armed Forces, you can choose whether or not you want to include nontaxable pay as earned income for the EITC. Examples of nontaxable pay from the armed forces are combat pay, the basic allowance for housing (BAH), and the basic allowance for subsistence (BAS). You can find the amount of your nontaxable combat pay in box 12 of your W-2; it has code Q.

When opting not to include nontaxable pay, you must exclude all of it. You cannot include some types and exclude others. However, if you’re married, you can also choose for just one spouse to include nontaxable pay as earned income while the other doesn’t include it.

Members of the military who are on extended active duty outside of the U.S. are still considered to live in the U.S. for tax purposes.

Earned income for clergy members

Because ministers may have forms of self-employment income, there are situations where some of a minister’s income will not be earned income for the sake of the EITC.

Earned income includes any amount you received for performing your ministerial duties as an employee. Anything you earned for your ministerial duties, but not as an employee, do not count as earned income. This could include fees you are paid for performing a marriage, or payment you receive for delivering a speech.

The housing allowance or rental value that a minister receives as part of their pay is generally not reported as earned income for the sake of the EITC. This is true even though it is included in net earnings from self-employment. The exception is if you have an approved Form 4361 or Form 4029.

If you have an approved 4029 form, do not subtract losses you reported on your Schedule C, Schedule C-EZ, or Schedule F from your wages on line 7 of Form 1040.

If you’re self employed, you may also need to learn more about making estimated tax payments.

Who is a qualified child?

Any child you claim as part of the EITC must meet the IRS rules of a “qualified child.”

First, a qualified child must be either your child, an adopted child, stepchild, foster child, or a direct descendant of any of those. You can also claim your brother, sister, half-brother, half-sister, stepbrother, stepsister, niece, or nephew.

Anyone you claim must also meet meet one of the following age requirements:

  • The child is under the age of 19 on the last day of the tax year (December 31).
  • The child is under the age of 24 and a full-time student.
  • The child is any age but has a permanent and total disability.

Additionally, the child must live within the U.S. and with you (or your spouse if you’re filing a joint return) for more than half of the year. They must also have a Social Security number and cannot file a joint return with anyone else.

If you have dependents, there are other credits to consider, such as the child tax credit. Learn more about tax credits and deductions for dependents.

How much is the earned income tax credit?

The amount of the EITC depends on your income and how many children you have. For 2020, the maximum earned income tax credit amount you can get is

  • $538 if you have no qualifying children
  • $3,584 if you have one qualifying child
  • $5,920 if you have two qualifying children
  • $6,660 if you have three or more qualifying children

For 2019, the maximum possible earned income tax credit possible was

  • $529 if you had no qualifying children
  • $3,526 if you had one qualifying child
  • $5,828 if you had two qualifying children
  • $6,557 if you had three or more qualifying children

How to claim the earned income credit

You cannot claim the credit unless you file a federal tax return. When you file your tax return, you need to enter the amount of your earned income tax credit on line 18a of Form 1040.

Any online tax filing service that you use will calculate your credit for you. If you’re calculating the credit on your own, you can either follow the steps in the Form 1040 instructions or you can use the EITC Assistant tool from the IRS.

To help make filing easier, have the following documents and information ready:

  • The Social Security number (or tax identification number) and birth date for you and all children you’re claiming
  • Copies of last year’s federal and state returns
  • Any other income statements you have, such as W-2 forms, 1099 forms, and any other records of income or losses
  • Information reporting forms, including 1095-A, 1095-B or 1095-C
  • Your bank routing number and account number to direct deposit any tax refund
  • The name and address of any paid caretakers, if the child you’re claiming had caretakers

If you have any qualifying children, you also need to fill out Schedule EIC. Schedule EIC is a very simple form. It has only six lines and and asks you questions about who your children are, how old they are, and how long they lived with you.

It is still possible to file your tax return for free when claiming the EITC.

Schedule EIC line by line

Start by writing your name at the top of the form. Lines 1 through 3 are for the names, Social Security numbers (or tax identification numbers), and dates of birth for each qualifying child. To prevent filing issues, write your children’s names as they appear on their Social Security cards.

Line 4 has two parts. Line 4a asks whether your child is under age 24. If they are, you don’t need to do anything on Line 4b. If your child is 24 or older, you need to check a box on Line 4b to say whether or not the child has a disability.

Write the child’s relationship to you on Line 5.

Line 6 requires you to write how many months out of the past year the child lived with you.

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About the author

Personal Finance Expert

Derek Silva

Personal Finance Expert

Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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