“Childless” taxpayers and the Earned Income Credit
Taxpayers who were previously excluded from the earned income credit because of their living situations may now be able to claim it
The Earned Income Credit (EIC) is a refundable credit available for taxpayers with and without qualifying children. What does it mean to have a qualifying child? Before 2017, the mere presence of a child in a taxpayer’s home often meant that he or she was ineligible for the “childless” EIC — even if the taxpayer had absolutely no claim on the child’s dependent exemption and other child-related tax benefits. Revised IRS guidelines now make it possible for these taxpayers to claim the EIC if they meet income limits and all other requirements – and the child is treated as someone else’s qualifying child.
Meet Steve Green, a 27-year-old graduate student, single, and living with his parents, Ron and Delia Green. When Steve began his MBA during the tax year, they all agreed it would be best for him to move back home and get a part-time job to keep his expenses and student debt low. The arrangement has worked out well.
Steve earned about $12,000 during the tax year. Some of it went toward personal expenses and a share of household expenses, but he put most of it toward tuition, which was the plan.
When Steve completed his tax return, he was pleasantly surprised to learn that he qualified for an EIC of more than $200. As its name indicates, the EIC requires taxpayers to have earned income (i.e., income from a job or self-employment).
Anyone claiming the credit must:
- Have adjusted gross income (AGI) and investment income below certain limits.
- Be a U.S. citizen or resident alien all year.
- Have a Social Security Number valid for employment.
- Not use the married filing separately filing status (Note: certain taxpayers may be considered unmarried and qualify to file using the head of household filing status instead, or may qualify under an exception for certain married taxpayers beginning in 2021 under the American Rescue Plan Act).
- Not exclude any foreign earned income or deduct or exclude a foreign housing amount by filing Form 2555.
- Have earned income.
Steve had heard of the EIC before, but always thought it was only for people with children. Here, let’s go over the rules for what the tax code (§32(c)(1)(A)(ii)) calls the EIC for “an individual who does not have a qualifying child” – also called “no child” or “childless” EIC.
How the childless EIC works
The requirements above apply to anyone claiming the EIC (with or without children). In addition to those, individuals claiming the childless EIC must:
- Be at least age 25 and under age 65 (Note: In 2021 only, the age limit is modified and generally any taxpayer age 19 or older meets the age test).Not be a dependent or qualifying child of another taxpayer.
- Live in the U.S. more than half the tax year.
- Not have a qualifying child.
Steve met every one of these requirements in the tax year. His living, school, and work arrangements were pretty much the same in the following year – but there was one difference. Early in the following year, Steve’s older sister, Ella, also moved back home, but not for the same reasons Steve did. Ella was recently divorced and moved home to make ends meet. And she brought somebody with her: her two-year-old son, David. Ella’s ex-husband (David’s father) is estranged from the family.
Does this mean Steve has a qualifying child?
Who is a qualifying child for the EIC?
For the EIC, a taxpayer’s qualifying child must:
- Be younger than the taxpayer and under 19 (under 24 if a full-time student), or any age and totally disabled.
- Live with the taxpayer more than half the year.
- Be the taxpayer’s child or sibling, including descendants of either, or the taxpayer’s eligible foster child.
- Not file a joint return.
By this standard, David is a qualifying child of his mother, Ella; his grandparents, Ron and Delia; and his uncle, Steve. This creates a “tie-breaker” situation.
What happens when more than one taxpayer can claim a child?
Under the tie-breaker rule*, if a child meets these criteria for more than one person in the home, the child’s parent has the superior claim. The parent can let another taxpayer claim the child, but only if that individual’s AGI is higher than the parent’s AGI. By these rules, Ella would have first claim on David. She could let her parents or brother claim him instead, depending on their incomes relative to hers.
When a taxpayer “wins” the tie-breaker rule to claim a child**, the child is treated as the qualifying child of only that taxpayer and not of anyone else. The family member who claims David claims all the child-related tax benefits that apply. For instance, Ella can’t let her parents claim David for the child tax credit and keep the EIC for taxpayers with children for herself.
As long as Ella claims David, or even if she lets her parents claim David, Steve is still “childless,” and he can still claim the childless EIC, as long as he meets all the requirements.
Such has not always been the case. In January 2017, the IRS issued proposed regulations with a new stance on childless EIC.
Before the change, Steve wouldn’t have been allowed to claim the childless EIC. In Pub. 596, Earned Income Credit, the IRS took the following position (emphasis added):
“If you meet Rule 8 [the part of the publication that lists the qualifying child rules], you have a qualifying child. If you meet Rule 8 and don't claim the EIC with a qualifying child, you cannot claim the EIC without a qualifying child.”
Rule 8 now has the following language: “If you meet Rule 8, you have a qualifying child. If you meet Rule 8 and don't claim the EIC with a qualifying child, you can claim the EIC without a qualifying child.”
Because David meets all the qualifying child requirements with respect to Steve, Steve was considered to “have a qualifying child.” That was true even if Steve didn’t claim David or couldn’t possibly have claimed David. For example, say that Steve’s AGI was considerably lower than Ella’s. He would not have been able to claim David under the tie-breaker rules, yet he would still have been treated as having a qualifying child, disqualifying Steve from the childless EIC.
Under current guidance, a taxpayer has a qualifying child only if the taxpayer is allowed to and is actually claiming the child under the tie-breaker rules. If the child meets the qualifying child tests for more than one person, any taxpayer who is not claiming the child under the tie-breaker rules is not considered to have a qualifying child for purposes of the “childless” EIC. This means that an individual, such as Steve, is eligible for the childless EIC even if he lives with a child who meets the qualifying child tests. In other words, Steve did not suddenly become ineligible for the childless EIC when Ella and David moved into the Green home.
There is also the potential for Steve, or Ron and Delia to claim David as a qualifying child – again, depending on their income, other EIC rules, and Ella’s willingness to have someone else claim David. In that event, Ella may be eligible for the childless EIC herself if her income is within the parameters. Note that this does not equate to “splitting” child-related benefits, which is not allowed. If Ella permits her parents or brother to claim David, then she is treated as not having a qualifying child.
What is the best course of action for this family? Ideally, they should speak with a tax advisor and work together to see who benefits the most by claiming David as a qualifying child.
The American Rescue Plan Act of 2021 addresses a related situation. Before the ARPA, if a taxpayer had a child without an SSN, the taxpayer was not eligible to claim the childless EIC. Under the ARPA, the taxpayer may claim EIC for taxpayers without qualifying children. The change applies starting in 2021.
*Additional “tie-breakers” apply if more than one parent can claim the child and the parents aren’t filing a joint return. See §152(c)(4)
**The situation is a bit more complicated if divorced or separated parents have a custodial agreement and the child’s exemption (and child tax credit, if applicable) is released to the noncustodial parent. This is the only instance in which child-related benefits may be split. See §152(e)
Editor’s note: The Tax Cuts and Jobs Act of 2017 temporarily set the dependent exemption at $0. However, the tie-breaker rule described above still applies in determining who can claim a child for child-connected benefits.