What Is Earned Income Credit (EIC)?
The EIC (Earned Income Credit) was created as a tax incentivizing low-to-moderate income people and families in the work force. The credit encourages working and helps reduce poverty by giving out a refundable tax credit to employees of eligible businesses (the EITC). There are two parts of the EITc, a refundable part that offsets taxes owed and increases potential tax refunds
Who Qualifies for EIC?
Eligibility for the EIC would require you to meet these criteria:
- Earned Income- You must have earned income, from wages, salaries/tips, self-employment income.
- You must have an income that is below the threshold amounts specified by the IRS.
- Must file a federal tax return
- Amount of the credit is based on:
- Your earned income or adjusted gross income
- Your filing status (single, married filing jointly, or head of household)
- The number of qualifying children you have
It’s important to note that you could still qualify for a tax credit even if you didn’t have any children and your income was still below the threshold amounts.
How Is EIC Calculated?
The dollar amount of your EIC depends on three things:
- Earned income (i.e., wages; salary; self-employment income);
- Tax filing status (e.g., single, married, head of household); and
- Number of qualifying children (generally, having more qualifying children increases your credit).
The amount of EIC you receive increases with earned income, until you reach the maximum, and then decreases as your earned income exceeds the threshold for the EIC.
The tools for calculating your EIC:
- IRS EITC tables and
- Tax preparation software, which help you determine the exact credit you will receive, based on your individual situation