Back to basics: the Earned Income Credit, explained
What it is, who can get it, and an overview of the rules
The Earned Income Credit (EIC) is one of the largest anti-poverty programs in the United States. Congress created the EIC in 1975 as a work incentive for people who have low-to-moderate incomes. The IRS estimates that in 2016, more than 27 million eligible workers and families received more than $67 billion in EIC refunds. That’s an average of $2,455 per individual or household.
The EIC is a refundable tax credit. That means if the credit amount is more than a taxpayer owes in taxes, the taxpayer will get the rest as a refund.
The rules for qualifying for the credit are extensive and can be confusing, which may help explain why only four out of five of eligible taxpayers are claiming it. This article covers the rules to qualify for the EIC; however, as is usually true in the tax code, there are exceptions and details in nearly each rule that can make or break a taxpayer’s eligibility.
To qualify, everyone must meet the eight general eligibility requirements
These rules apply to all taxpayers, regardless of whether they have a qualifying child for the EIC.
Rule 1: Taxpayers’ adjusted gross income (AGI) and earned income must each be less than the limit.
Taxpayers can qualify for the EIC only if their AGI and their earned income are each below a certain limit based on the taxpayer’s family size, filing status, and the tax year. “Earned income” generally includes income from work performed, farm income, and certain disability payments.
Dollar limits on AGI and earned income to qualify for the EIC
For 2017 returns, the taxpayer’s earned income and AGI must each be less than these limits:
|Filing status||Qualifying children claimed|
|Zero||One||Two||Three or more|
|Single, Head of Household, or Qualifying Widow(er)||$15,010||$39,617||$45,007||$48, 340|
|Married filing jointly||$20,600||$45,207||$50,597||$53,930|
|Maximum credit allowed*||$510||$3,400||$5,616||$6,318|
*Keep in mind that these are maximum credit numbers. Depending on other factors, taxpayers may qualify for less than these amounts. Taxpayers should claim only the amount of credit they qualify for, up to the limit.
Rule 2: Taxpayers’ investment income must be less than the limit.
Like the limit on AGI and earned income, to qualify, taxpayers’ investment income must be less than $3,450 for all filing statuses (2017). Also, like the AGI and earned income limit, this number is adjusted for inflation.
Rule 3: Taxpayers must have a valid Social Security Number (SSN).
To claim the EIC, the taxpayer, spouse, and any qualifying children listed on the Schedule EIC (if applicable) must all have valid SSNs issued before the return’s due date (including extensions). The SSN must be valid for employment.
For additional information on SSN cards that read “Not valid for employment” or “Valid for work with INS or DHS authorization” and other situations, see IRS Publication 596, Earned Income Credit, Chapter 1 – Rules for Everyone.
For more information about how tax identification numbers affect claiming refundable tax credits, see “Timing is everything: The date taxpayers get an SSN or ITIN now affects whether they’re eligible for refundable tax credits.”
Rule 4: Married taxpayers can’t file separately.
To be eligible to claim the EIC, married taxpayers can’t file separate returns. If a married couple can’t agree to file jointly, they must use the married filing separately status and lose the credit. That’s unless one or both qualify for head of household filing status. In other words, if taxpayers are married and want to claim the EIC, they can file only jointly or as head of household.
For more, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Rule 5: Taxpayers must be U.S. citizens or resident aliens all year.
If a taxpayer was a “nonresident alien” for any part of the tax year, he or she can’t claim the EIC. That’s unless the nonresident is married and filing jointly with a U.S. resident. Filing jointly allows the nonresident spouse to be treated as a U.S. resident. However, by filing a joint return, the couple will owe taxes on their worldwide income, so they must weigh the tax benefits of their filing options.
For information on residency status, see IRS Publication 519, U.S. Tax Guide for Aliens.
Rule 6: Taxpayers can’t file Form 2555 or Form 2555-EZ.
If taxpayers file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, to exclude income they earned in foreign countries or to deduct or exclude a foreign housing amount, they can’t claim the EIC.
Rule 7: Taxpayers must have earned income.
Even though taxpayers’ earned income must be below a certain limit to claim the EIC, they must have some earned income to be eligible.
Determining what counts as earned income can be tricky. Generally, it means income that taxpayers have worked for, such as wages, salaries, tips, and other types of employee compensation – but only if those amounts are included in the taxpayer’s gross income for the taxable year.
For more, check out IRS Publication 596, Earned Income Credit, Chapter 1 – Rules for Everyone.
Rule 8: Taxpayers can’t be a qualifying child of another taxpayer.
For example, if Bob is the qualifying child of Jane, Bob can’t claim the EIC on his return, even if Jane doesn’t claim him as a dependent on her return. Certain other exceptions apply. For example, if Jane isn’t required to file a tax return and she doesn’t file, or she files only to get a refund, Bob won’t be considered a qualifying child and he can claim the EIC on his own return.
For examples of the exceptions, see IRS Publication 596, Earned Income Credit, Chapter 3 – Rules If You Do Not Have a Qualifying Child.
Two extra rules for taxpayers with a qualifying child
Rule 9: Taxpayers’ children must meet four tests to be a qualifying child.
Four tests determine whether an individual is a qualifying child for the EIC.
1. Relationship test. The child must be related to the taxpayer in one of the following ways:
- Son, daughter, stepchild, foster child, adopted child, or a descendant of any of these (a grandchild, for example), or
- Brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of these (a niece or nephew, for example)
For more information on these relationships or who exactly is a foster child, see the IRS Publication 596, Earned Income Credit, Chapter 2 – Rules If You Have a Qualifying Child.
2. Age test. The child must be:
- Under age 19 at the end of the tax year and younger than the taxpayer (or spouse, if filing jointly)
- Under age 24 at the end of the tax year, a student, and younger than the taxpayer (or spouse, if filing jointly), or
- Permanently and totally disabled at any time during the tax year, regardless of age
For more information about who is a student or who qualifies as permanently and totally disabled, check out IRS Publication 596, Earned Income Credit, Chapter 2 – Rules If You Have a Qualifying Child.
3. Residency test. The taxpayer’s child must have lived with him or her in the United States for more than half of the tax year. If not, the taxpayer can’t claim the EIC, even if the taxpayer paid all expenses for the child.
This test is usually straightforward, but taxpayers can get confused about military personnel, birth and sudden death of a child, temporary absences, or kidnapped children. For more information about these issues, check out IRS Publication 596, Earned Income Credit, Chapter 2 – Rules If You Have a Qualifying Child.
4. Joint return test. The child can’t file a joint return for the year unless the child and the child’s spouse file only to claim a refund of income tax withheld or estimated tax paid.
For example, if Brian is married and files a joint return for the tax year, Brian’s mother, Jennifer, can claim him or his spouse as dependents for the EIC, only if:
- Brian and his spouse aren’t required to file a return and don’t have a child, but file for a refund of withheld taxes, or
- The facts are the same, but Brian files a return to obtain a refund of estimated tax paid.
Jennifer can’t claim either spouse as a dependent if the spouses claim the EIC on their joint return.
Now suppose Brian doesn’t file a joint return. Because he’s married, he can be his mother’s qualifying child only if:
- She qualifies to claim an exemption for Brian, or
- The reason she can’t claim the exemption is because she released the exemption to Brian’s other parent under the special rules for divorced and separated parents, described below.
For more information on the joint return test, and other issues and examples related to it, please see the IRS Publication 596, Earned Income Credit, Chapter 2 – Rules If You Have a Qualifying Child.
Rule 10: Taxpayers’ qualifying children can’t be the qualifying children of another taxpayer.
Defining family can get complicated. A child could be a qualifying child of more than one taxpayer in a myriad of ways. Some common examples of who could claim a child include the child’s parents, grandparents, or even former spouses of a parent.
If more than one taxpayer can claim a child for the various child-related tax benefits, the taxpayers can’t split the benefits. In other words, only one taxpayer can claim the child as a qualifying child for all the following child-related benefits:
- Dependent exemption
- Child tax credit (and the additional child tax credit)
- Head of household filing status
- Child and dependent care expenses credit
- Dependent care benefits exclusion
Even if a person meets all the tests to be another taxpayer’s qualifying child, that person may not be considered a qualifying child in certain circumstances. For more information about these certain circumstances, please see the IRS Publication 596, Earned Income Credit, Chapter 2 – Rules If You Have a Qualifying Child.
If the two taxpayers can’t agree on who will take the tax benefits relating to the qualifying child, and more than one person claims the same qualifying child for the EIC, the IRS will apply the tie-breaker rules.
For example, two unmarried parents, Matthew and Maureen, each filing single, have two children, Sarah and Lauren, who are both eligible to be qualifying children of each parent. Matthew and Maureen could each claim both of their children for the above child-related tax benefits (assuming they are eligible). If they did try to claim the same children, the IRS would use tie-breaker rules to determine which parent should be allowed to claim the children and accompanying tax benefits. One way to allow both parents to remain eligible for the benefits is to have them each agree to claim a different qualifying child.
One exception: Divorced or separated parents (or who live apart) can agree to split certain tax benefits
Steve and Amanda are legally divorced, and their son, John, lives with Amanda. Amanda signed a release form that allows Steve to claim the dependent exemption and the child tax credit for John. When Amanda, the custodial parent, signs this release form, she keeps the rest of the child tax benefits, including the EIC. Amanda files as head of household and claims the EIC. Steve can’t claim the EIC with John as a qualifying child.
For more information about Form 8332, Release/Revocation of Release of Claim to Exemption for Child by the Custodial Parent, see IRS Publication 504, Divorced or Separated Individuals. Also see “When divorce decrees and federal tax law aren’t on the same page, taxpayers can lose dependent benefits.”
Keep in mind that if a child is the qualifying child of more than one taxpayer (including but not limited to divorced or separated parents), but no one claims the child for the EIC, then none of those people can claim the EIC at all.
Three extra rules for taxpayers who don’t have a qualifying child
In addition to the rules for everyone, taxpayers who don’t have a qualifying child for the EIC must meet certain additional requirements.
Rule 11: Taxpayers must be at least 25 and under 65 years old by the end of the tax year.
If taxpayers file jointly with a spouse, only one of the couple must qualify for this age rule.
Rule 12: Taxpayers can’t be another taxpayer’s dependent.
For example, if Susan qualifies as Robert’s dependent, Susan can’t claim the EIC on her return – even if Robert doesn’t claim Susan as a dependent.
For more information and excellent examples on whether a person qualifies as a dependent, check out IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Also, see “'Childless' taxpayers and the Earned Income Credit.”
Rule 13: Taxpayers must have lived in the United States for more than half the year.
The taxpayer (and spouse, if married filing jointly) must live in the 50 states or the District of Columbia for 183 days or more during the year. This doesn’t include Puerto Rico or U.S. possessions, such as Guam, American Samoa, the U.S. Virgin Islands, etc.
Don’t forget: paid tax preparer due diligence requirements
A paid tax preparer has an additional duty when it comes to the EIC. There are four due diligence requirements that a paid tax preparer must fulfill when preparing a return with the EIC.
One of the requirements is to complete Form 8867, Paid Preparer’s Earned Income Credit Checklist. Form 8867 will ask the preparer to confirm that he or she met all due diligence requirements when determining whether a taxpayer was eligible for the EIC.
These rules can be tricky at first glance
It’s important for taxpayers and tax professionals to go through the rules carefully to understand EIC requirements. It’s also worth the time and effort. Remember, taxpayers who are eligible for the credit but don’t claim it could be missing out on an average of $2,455. Credits are meant to be claimed, and this one can make a big difference.