Don’t Overlook the Earned Income Tax Credit

• Posted on May 10, 2011
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The Earned Income Tax Credit (EITC) is a refundable credit primarily for lower-income individuals and couples with qualifying children.  The credit offsets any tax liability of the taxpayer(s) and, if there is any left over, it is fully refundable.  The IRS reports that 1 in 5 individuals that qualify for the credit failed to claim it.

The credit is based upon an individual’s financial, marital and parental status for the year.  The credit increases with earned income until the maximum credit is reached and phases out for higher-income taxpayers.  For 2011, the following is the maximum credit based on the number of children and income level at which the credit is fully phased out.

Number of Qualifying Children:        None         One         Two         Three
Maximum Credit ………                    $464      $3,094      $5,112     $5,751

Totally Phased Out when AGI or Earned Income Exceeds:

Joint Filers                  $18,470     $40,545    $45,373    $48,362
Others                          $13,460     $35,535    $40,363    $43,352

The following are the general requirements to claim the credit:

1.  A federal income tax return must be filed to claim the credit even if the taxpayer is not otherwise required to file. 

2.  A qualifying child must live with the taxpayer in the U.S. for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home.

3.  Requirements for a qualifying child:

- The child must be under age 19 at the end of the tax year or be a full-time student under age 24 at the end of the tax year.  A child who is permanently and totally disabled is a qualified child regardless of age.

- The child will not be a qualifying child if he or she files a joint return, unless the return is filed solely to claim a refund.

- The child must be younger than the taxpayer who is claiming the EIC.  This means, for example, that a taxpayer cannot claim the credit for an older brother or sister.

4. The credit is NOT available to individuals whose filing status is Married Filing Separately.

5. The credit is NOT available to individuals when their “disqualified income” (i.e., investment income) is more than $3,150.

6. The filer, spouse (if filing a joint return) and any qualifying child included in the computation must have a valid SSN issued by the Social Security Administration.

7. The filer or spouse must have earned income.  Earned income is income from working, such as wages, profits from self-employment, income from farming, and, in some cases, disability income.  If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age.

8. Special rules apply to members of the U.S. Armed Forces in combat zones.  Members of the military can elect to include their nontaxable combat pay in earned income for the EITC.  If you make this election, the combat pay remains nontaxable.