It’s my annual “Taxes from A to Z” series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
E is for Earned Income Tax Credit (EITC).
The Earned Income Tax Credit (EITC) or Earned Income Credit (EIC) is a refundable tax credit targeted to working people with low to moderate-income.
A refundable credit means that you can take advantage of the credit even if you do not owe any tax. Unlike with a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is instead refunded to you.
To qualify, you must meet certain requirements and file a federal income tax return for the tax year even if you do not owe any tax or are not required to file a tax return. This is a common misunderstanding and is one of the reasons why the Internal Revenue Service (IRS) has over a billion dollars in unclaimed refunds from year to year ($1.4 billion in unclaimed refunds for 2015 alone).
To qualify for EITC, you must have earned income (that’s why it’s called the earned income credit, get it?). Everybody seems to have a story about a neighbor who got back a huge refund but didn’t work to get it. Notwithstanding that you don’t always know the details about that person’s finances, those refunds—if legitimately obtained—are not tied to the EITC.
Earned income typically includes wages, salary, tips, and net earnings from self-employment. It also includes union strike benefits and long-term disability benefits received prior to minimum retirement age. It may also include nontaxable combat pay (you have to make an election).
Earned income does not include passive income, which means income that you aren’t actively generating on your own, like interest and dividends. It doesn’t include pay that you receive while incarcerated, retirement income, Social Security, unemployment benefits and alimony. It also doesn’t include child support: Remember, that’s tax neutral.
If you have earned income, you, your spouse and any qualifying child (more on that in a bit) on your tax return must each have a valid Social Security number issued before the due date of your return (including extensions). You must also be a U.S. citizen or resident alien for the entire year. Again, we’ve all heard the stories about folks who aren’t in the country legally snatching up EITC tax refunds but barring fraud that’s not possible.
If you have earned income and a valid Social Security number, your filing status must be married filing jointly, head of household, qualifying widow(er), or single. You can’t claim the EITC if your filing status is married filing separately. You can find more on filing status here.
If you have earned income and a valid Social Security number and your filing status is not married filing separately, you must also meet certain income criteria. Specifically, your tax year investment income must be $3,500 or less for the year, and you must not file form 2555, Foreign Earned Income or form 2555-EZ, Foreign Earned Income Exclusion. You must have at least $1 in earned income (yes, that means that a self-employed person who claims a loss won’t qualify). Finally, your earned income and adjusted gross income (AGI) for 2018 must be no more than:
You can tell from the chart that your eligible credit is dependent on the number of your qualifying children. A qualifying child for the EITC must meet all of the following criteria:
- The child must be under age 19—age 18 or younger—at the end of the tax year OR the child must be younger than you or your spouse (if you file jointly) and under age 24 and a full-time student OR the child was any age and permanently and totally disabled;
- The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew;
- The child must have lived with you for more than half of the tax year (some exceptions apply); and
- The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.
Only one person can claim the same child for the same tax year.
As for you? You must not be the qualifying child of another person to claim the EITC.
If you have earned income and a valid Social Security number and your filing status is not married filing separately and you meet certain income criteria, you can claim the credit. The maximum amount of credit for Tax Year 2018 is:
- $6,431 with three or more qualifying children
- $5,716 with two qualifying children
- $3,461 with one qualifying child
- $519 with no qualifying children
The credit has been around since 1975. It was intended to offset the burden of Social Security taxes—a chunk of your pay over and above federal income taxes—and to provide an incentive to work since the credit is only available to workers who earn money from wages, self-employment or farm income. Last year, 25 million people received about $63 billion in EITC. The average amount received was more than $2,400.
Since 1975, the law has changed a few times. Under current law, the IRS must wait until mid-February to begin issuing refunds to taxpayers who claim the EITC or the ACTC.
The rules for the EITC can be tricky to navigate. Special rules apply to members of the military, ministers, members of the clergy, those receiving disability benefits and those impacted by disasters. Some age restrictions may also apply. For help, click over to the EITC Assistant on the IRS website or check with your tax professional.
For more Taxes From A To ZTM 2019, check out the rest of the series: