The Earned Income Tax Credit is a benefit available for low-income taxpayers in the United States. The qualification criteria for the EIC are complex and can be difficult to understand, but the amount of the credit can form a substantial part of a low-income earner's refund. The credit is refundable, meaning that, even if the taxpayer owes no federal taxes, he will still get the EIC credit as a refund.
What is the EIC?
The EIC has been around since 1974 and has grown to be available to more taxpayers over the years. Its purpose is to provide social assistance to those who earn income through working for an employer or self-employment. The EIC is income-geared and disappears as income rises. It provides a greater benefit for taxpayers who have eligible children. The EIC does not count as taxable income in the year received and therefore does not affect other social benefits such as welfare.
Qualifying for the EIC
The general qualification to receive the earned income credit is that income must be under $48,352 (as of 2011) if filing jointly and if you have three or more eligible children. If you have no children, income must be below $18,470. Eligible children are children in your care who are 18 or younger, including blood-related children, step-children, foster children and siblings. The children must live with you and be dependent on you for their living expenses. Another requirement to receive the EIC is that you must not have more than $3,100 in passive income, such as interest, dividends or royalties, in the year.
What Counts as Earned Income?
Earned income generally means income derived from working, rather than from passive sources, such as interest, dividends and royalties. Your earned income may be in the form of wages from an employer that will typically be reported at the end of the year on a W-2 form. Self-employed earnings also count if you have an unincorporated business. These earnings are reported on Schedule C. Disability payments from an employer-sponsored disability plan are also considered as earned income for EIC purposes as is combat pay for members of the Armed Services.
How Much Will I Get?
The amount of the EIC credit depends both on income and the number of qualifying children you have. The maximum credit, as of 2011, is $457 with no eligible children, $3,050 with one, $5,036 with two and $5,666 with three or more. The maximum credit possible is $5,666, regardless of income or number of children. The EIC is calculated on your personal tax return and either reduces the federal income tax otherwise owing or provides for a refund. Some states also have an earned income credit. Each has its own requirements and credits.