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What is the Earned Income Tax Credit?

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Earned Income Tax CreditThe Earned Income Tax Credit is a refundable tax credit that is designed to help low income workers. It was created in 1975 and has been expanded on several occasions, unlike some other tax laws, to continue to help low income taxpayers.

How does it work? If your earned income is under a certain amount, to be explained below, then you are given tax credits based on the number of qualifying children you have (including having no qualifying children). If you qualify, then you can get a tax credit on the following schedule based on the number of qualifying children:

  • $5,657 with three or more qualifying children
  • $5,028 with two qualifying children
  • $3,043 with one qualifying child
  • $457 with no qualifying children

2009 Earned Income AGI Limits

For 2009, to qualify for the EITC, your income must be less than:

  • Three or more qualifying children:
    • $43,279 for single filers
    • $48,279 for married filing jointly filers
  • Two qualifying children:
    • $40,295 for single filers
    • $45,295 for married filing jointly filers
  • One qualifying child:
    • $35,463 for single filers
    • $40,463 for married filing jointly filers
  • No qualifying children:
    • $13,440 for single filers
    • $18,440 for married filing jointly filers

Qualifying Children

This is where things can get complicated, as anything with the IRS is, because the rules on who qualifies as a qualifying child can get pretty specific. For example, they have to be under the age of 18 unless they are “permanently and totally disabled” or enrolled as a full-time student during some part of five calendar months (then they can be up to 23).

My advice? Use the EITC Assistant to find out if you qualify. Most tax software will probably do this for you, since they’re designed to maximize your refund, but just in case it’s always important to be informed even if software is supposed to handle it for you.

(Photo: bostontaxhelp)

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17 Responses to “What is the Earned Income Tax Credit?”

  1. Steven says:

    My parents were bummed when they lost the EITC after I graduated from college.

    But I was like, I support myself now, isn’t that a better trade-off than 2k?

    They were like, “Oh, but we still lost $2000.”

  2. zapeta says:

    Thank you for explaining this, Jim! Every year my tax software checks for this and I never really researched the EITC to see what it was all about.

  3. Adam says:

    The only part of the credit you missed that may be worth noting in this brief of a discussion is the curve it tends to follow. The EITC follows a sort of modified bell curve. That is, EITC increases with earned income until the maximum credit is reached holds constant for a range, and then begins to fall until the threshold is reached.

    In my opinion, the concept for this curve was that the first half of the curve provides incentive to lower income earners to increase wages while the second half of the curve establishes a minimum baseline of income (between earned income and the credit).

    Plotting the sum of earned income and the EITC results in lines that start following a 45 degree line (1 for 1 increase) then jump above it and slowly converge back down to it.

    At $20,000 Earned Income (2008 numbers, MFJ with 2 QC) the credit is worth just under $5,000 ($4,553 to be exact). Basically, congress decided that at this level a married couple with two children need $1.25 for every $1.00 earned. This ratio never drops below 1:1 but varies up to 5:4 (which is the example).

    I have charts showing the above trends for 2008, if Jim wants I can email them to him.

  4. Chris says:

    Thanks Jim. I never quite knew what this was.

  5. I continue to find families in my work who don’t know about this. It surprises me every time.

  6. eric says:

    Knew of it but thanks for the specifics

  7. Shirley says:

    Thanks! I will check this out as a grandson has been living with us all this year.

  8. CK says:

    What is the Earned Income Tax Credit?
    Welfare.

    • Jessica says:

      A.K.A. redistribution of wealth!

    • Lisa says:

      NO IT IS NOT!!! WE DO NOT GTE ANY WELFARE, BUT 4 ONCE, WE GET EITC!!! KISS BUTT! U R JUST JEALOUS!

      • tammi says:

        It is redistribution. If you are getting back more than you paid in. Total crap, not jeolous of your legal ability to screw other tax payers and this country.

  9. Good explanation of this important benefit. One of my research assistants was able to finish her degree largely because of the EITC, after her husband left her to run off with a chickadee in his office. Nothing like family values to keep us all off welfare, eh?

  10. aua868s says:

    i would not qualify for this…but i feel happy that i am make enough not to qualify for this!

  11. Paige says:

    I have to agree with CK. I know people that get $5-7K back every year. That is ridiculous. They might as well not even pay in. Welfare is exactly what this is.

  12. choc62 says:

    earned is good incentive for people to go to work, otherwise everything they make goes out the door any way and welfare looks better, and thats your tax dollar, eitc doesn’t come out of your pocket, so don’t hate, appreciate….

    • ladam8518 says:

      EITC doesn’t come out of my pocket?

      Think of the Tax System as a general system governed by:

      Money In – Money Out + Money Created = Accumulation

      In general system analysis Accumulation is set to zero (to achieve a steady-state) and to avoid devaluing the currency Creation should be set to 0.

      As an example take a single filer claiming two children who has maximum federal withholding and earned $15,000 for the year paid semi-monthly. This person paid $1,125 (using IRS Pub 15, 2010 version) in Federal Income tax withholding. They would be eligible for about $5,000 of EITC (using 2008 numbers), This results in a $3,875 deficit that must be made up by other tax payers (or reduced government spending, if ever possible) in order to achieve a steady-state.

      Unlike most credits, EITC is a refundable credit (also called a below-the-line credit). This means you can get it refunded back to you. Nonrefundable (or above-the-line) credits are limited to the taxpayer’s tax liability. If someone gets a refund due to above-the-line credits, all that is being refunded comes from that persons withholding or other tax payments.


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