The Earned Income Tax Credit (EITC) is an income tax credit given to low- and moderate-income workers through filing a tax return. It is a refundable tax credit, meaning that you will receive it if you are eligible even if you don’t have any tax liability. When you file your 2019 taxes next year, you could be eligible for $529 – $6,557 in EITC based on your filing status, total income, and how many qualifying children you have. In some cases, the credit can even exceed the taxes that were taken out of your paycheck for the year.
Because of this, the IRS has several confusing rules concerning who is eligible for EITC and has several punitive measures in place to prevent EITC fraud. You may be forced to relinquish your EITC while under investigation and barred from claiming it for 2 – 10 years if you are deemed to have willfully filed an incorrect tax return in order to get this money.
While some errors are made in good faith, typically in situations like taxpayers who divorced and accidentally claimed the same child as a dependent for EITC purposes, EITC fraud also runs rampant in certain areas so it’s best to be armed with as much information as possible about this tax credit. To better understand EITC and how it works, here’s what you need to know about proving that you qualify for the credit.
What is “Earned Income”?
Earned income is from a job or self-employment. If most of your income is primarily from a pension, Social Security, unemployment comp, welfare, or other types of aid, then you can’t use these sources to count towards EITC. You can still have them, but your EITC amount is pegged to what you earned from a job, owning a business, or freelancing. There are also specific rules that apply to persons with disabilities who have both earned income and disability pensions.
Because EITC is a refundable credit, you can receive a tax refund in addition to the taxes withheld from your paycheck. If you are self-employed, it can also help the amount you may owe for self-employment tax.
Who is Eligible for EITC?
There are four categories of EITC recipients:
- No qualifying children
- One qualifying child
- Two qualifying children
- Three or more qualifying children
After having at least $1 of earned income, if you have no qualifying children, you must be at least 25 years of age but not over 65. You also must have resided in the United States for at least half the year, and no one else can claim you as a dependent or qualifying child on their tax return. The amount of EITC adults without children receive is far lower than that for taxpayers with qualifying children, but the same rules still apply.
The age restrictions are lifted if you have at least one qualifying child.
You can have other types of income and still receive EITC, both those that get reported on your tax return and those that do not, although your total income reported on your tax return will also be looked at when determining your eligibility. However, if your investment income (such as dividends, interest, stock transactions, and rental activity) exceeds $3,600, you cannot get the credit.
Using the Correct Filing Status
Using the wrong filing status is a common cause of EITC errors. You must file as single, married filing jointly, qualifying widow(er), or head of household in order to claim the credit. Taxpayers who file as married filing separately cannot get EITC.
It’s a common mistake to file as single when your correct status is head of household if you have a qualifying child for EITC purposes. You may also be filing as single or head of household if your significant other lives with you but you are not married, since depending on the state you live in you may be considered common-law married for tax purposes. Filing status makes a major difference in EITC eligibility and the amount received, so it’s important to determine if your filing status is correct when filing your tax return.
Is My Child a Qualifying Child for EITC Purposes?
There are age, relationship, and residency requirements in order for a child to be your qualifying child for EITC purposes.
A qualifying child must be younger than the taxpayer claiming the credit and under the age of 19 (24 if a full-time student). There are no age restrictions if your child is permanently and totally disabled.
The child must be your son, daughter, stepchild, adopted or foster child, or a descendent like a grandchild. Nieces and nephews, siblings, half-siblings, and stepsiblings also count but cousins do not. They can qualify provided that they have a valid Social Security number and lived with you and your spouse in the United States for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home.
If you can prove that your child lives with you more than six months of the year and you are supporting them with your income, you shouldn’t have issues in the event of an EITC examination.
Determining whether you qualify for the EITC can be complex, but it’s a highly valuable tax credit that you don’t want to miss out on if you are eligible. If you’re unsure whether you qualify or don’t know how to claim the credit, contact a tax professional for assistance.