Who Qualifies for the Earned Income Tax Credit, How Do They Qualify and How Much Is the Credit?Published:
Getting paid for getting a paycheck? Yes please.
Qualifications for Earned Income Credit
Earned Income Credit (EIC) is a federal tax credit designed to provide financial assistance to low-income and moderate-income working individuals and families who have earnings below the adjusted gross income (AGI) limit and investment income limit.
The threshold changes every year, so it’s important to check with a tax preparer. The exact amount of the federal credit depends on filing status, income level, and the number of qualifying children.
A single taxpayer with zero children or relatives on their federal return can qualify for $600 in tax year 2023 if they made less than $17,640 in earned income and investment income less than $11,000.
Married taxpayers filing jointly with three children can qualify for $7,430 if they made less than $63,698 in earned income and also had less than $11,000 in investment income.
Who Qualifies for the Earned Income Tax Credit?
To be eligible for the EIC, your earned income and adjusted gross income (AGI) must be within certain income limits, which vary depending on your filing status, number of qualifying children, and income. For the tax year 2023, the limits range from $17,640 to $63,698, depending on your filing status and the number of qualifying children you have. The investment income limit for 2023 is $11,000.
You must also have a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) to claim the EIC. Qualifying children must also have a valid SSN to be eligible for the credit.
To qualify for the EIC, you must also meet certain criteria regarding your marital status and filing status. You can be married or unmarried, but you must file either as married filing jointly, head of household, qualifying widow(er), or single.
Qualifying children are also a significant factor when determining your eligibility for the EIC. A qualifying child must meet several criteria, including age, residency, relationship, and support. To qualify, the child must be under the age of 19 or a full-time student under the age of 24 at the end of the tax year. They must also have lived with you for more than half of the year and must be related to you as your child, stepchild, foster child, sibling, or descendant of any of these.
The IRS also has special rules for clergy members, military members, and taxpayers and their relatives with disabilities.
Members of the Armed Forces who received nontaxable pay, as well as their spouses, are not required to report it as earned income on their federal tax returns. If you and your tax preparer choose to include nontaxable pay as earned income for the EITC, you may owe less tax and get a larger refund. The person who includes your nontaxable pay as earned income must include all of it. Nontaxable pay includes combat pay in combat zones, basic allowance for housing and basic allowance for subsistence.
The IRS considers members of the military on extended active duty outside the Unites States to have their main home in the United States for tax purposes.
Military Personnel Stationed Outside the United States
We consider members of the military on extended active duty outside the Unites States to have their main home in the United States for tax purposes.
For a definition of extended active duty, see Publication 596, Earned Income Credit.
Clergy Member or Minister
Clergy members or ministers are required to report the rental value of their home or housing allowance provided by the church, as well as their income as an employee if they work as a minister.
If a church provides housing to a minister as part of their compensation, the rental value of the home or housing allowance should be included as earned income from self-employment for the EITC. This value is equivalent to the amount the church would charge for rent. However, if the individual has an approved Form 4361 or Form 4029, this step is unnecessary.
Individuals may obtain forms to request an exemption of their income from Social Security taxes.
- Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits
- Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners
If you work as a minister who is also an employee and receive income, it should be counted as earned income, including wages, salaries, tips, and other taxable employee compensation, even if you have an approved form to exempt your income from Social Security taxes.
Income received from work as a non-employee minister, such as self-employed wages, marriage fees, and honoraria for speeches, should not be considered earned income.
Benefits of the Earned Income Credit
The Earned Income Credit (EIC) offers the most benefit to taxpayers who qualify with children. Claiming this credit on your tax return can result in significant financial benefits, such as reducing your tax liability or even potentially receiving a refund. Moreover, claiming the EIC can impact an individual’s eligibility for other tax credits, such as the child tax credit. By qualifying for the EIC, individuals may also become eligible for these other tax credits.
All children must qualify to be counted for the refundable tax credit. For low and moderate-income families, the EIC can be especially helpful in making ends meet. It provides a valuable credit that can help offset other expenses or debts.
Individuals who claim the EIC in 2023 can also earn $600.
How much is the earned income tax credit for 2023?
The amount of the Earned Income Credit (EIC) varies depending on an individual’s income, filing status, and number of qualifying children. The credit amount is calculated based on a percentage of the individual’s earned income, with a maximum credit amount set by the IRS each year.
For tax year 2023, the maximum credit amount ranges from $600 for individuals with no qualifying children to $7,430 for individuals with three or more qualifying children.
- $7,430 for three or more children
- $6,604 for two or more children
- $3,995 for one child
Types of Earned Income that Qualifies for EITC
To qualify for the EITC, you must have earned income from work. Various types of earned income can qualify for the credit. Wages, salary, tips, and income from gig economy work are all eligible forms of earned income for the EITC. If you receive benefits from a union strike fund or certain disability benefits, they may also count towards your earned income.
Another factor to consider is nontaxable combat pay. This type of pay can be considered earned income for the EITC, allowing military personnel to receive additional tax credits.
It is important to note that not all types of income qualify for the EITC. Unearned income, or passive income, has to be below the investment income limit for a tax payer to qualify for the federal credit.
Income from pensions, annuities, and child support are not considered earned income and do not count towards the credit.
How to Claim the Earned Income Tax Credit
Claiming this Earned Income Tax Credit (EITC) can result in a significant refund for those who qualify, so it is important to understand how to properly claim it.
Eligibility Requirements for the Earned Income Credit
One of the most crucial requirements for the Earned Income Credit is to have a valid Social Security number (SSN). Taxpayers who are married filing jointly must have valid SSNs for both themselves and their spouses by the due date of their tax return.
Taxpayers who file as married filing separately are disqualified from claiming the Earned Income Credit. However, separated taxpayers who aren’t filing a joint return can claim the credit if they meet certain specific requirements. When given the option, married couples who want the refundable credit should file a joint tax return instead of separate turns.
Another vital requirement is to be a U.S. citizen or resident for the entire tax year. Individuals who are filing a Form 2555 related to foreign earned income are not eligible for the credit.
Income limits are also essential when determining eligibility for the Earned Income Credit. In 2022, for example, the maximum income limit for a married couple filing jointly with three or more qualifying children is $61,000. Taxpayers must have earned income of at least $1 that doesn’t include pensions or unemployment benefits.
It’s worth noting that there’s a $11,000 investment income cap for the 2023 Earned Income Credit. Taxpayers who have investment income that exceeds this threshold are ineligible for the credit.
Tax Status Requirements
For example, if you are married, you may file jointly or separately, but if you’re married and filing separate returns, you cannot claim the EITC.
The amount of your EITC is also based on the amount of your earned income and the number of qualifying children you have. A qualifying child must meet certain requirements and be related to you either by blood, marriage, or adoption.
There are also additional eligibility requirements that must be met to qualify for the EITC, including income limits and filing status requirements. It’s important to note that the EITC is a refundable tax credit, which means that if the credit exceeds the amount of taxes you owe, you may receive a refund for the difference. This credit is designed to help low to moderate-income individuals and families by providing a valuable tax break.