Since 1975, the Earned Income Tax Credit has been providing American families with a federal subsidy designed to alleviate the burden of taxation and to encourage taxpayers to remain employed throughout the year. This benefit has been expanded over the last few decades as a way to provide some level of economic relief for low-income and middle class workers. This credit is interchangeably referred to as EIC or EITC.
In essence, the EITC allows qualified taxpayers to get back a fixed percentage of their annual income. Families with more than one child stand to get higher EITC amounts. Low-income taxpayers who do not have children or dependents may also qualify for the EITC, although the amount will be considerably lower. The EITC is paid through the refund indicated on an annual tax return.
The EITC is not determined by federal poverty guidelines. Instead, it's calculated by income levels and by the size of the taxpayer's family. The minimum age is 25 and the maximum age is 65. All income earners and dependents must have valid Social Security numbers. The EITC can be taken by taxpayers filing jointly or individually. The choice of filing should be left to accountants and tax preparation professionals.
As an example, let's say a married couple with three children produces an annual household income that is less than $53,000. the maximum EITC amount this family could receive would be $6,629. Individual workers who earn less than $14,880 per year would receive no more than $506. It is important to note that the EITC is a benefit and not a deduction.
Self-employed professionals and income earners who do not have a 9 to 5 job may still qualify to receive the EITC. To this effect, construction workers who are independent contractors and are paid by means of 1099 forms may still be eligible.
Investment income does not automatically preclude taxpayers from getting the EITC. An office worker, for example, may receive stock options from her employer as a performance bonus. Even if she exercises those options, she may still be eligible as long as her profit was not higher than $3,400 by the time she files her tax return.
Receiving child support, Social Security or early retirement income could render taxpayers ineligible to take the EITC. The same goes for unemployment benefits since the goal of this tax credit is to reward workers. Imprisoned workers do not qualify for the EITC.
In the end, the EITC is a benefit that low-income and middle class taxpayers should explore, particularly if they have children. In terms of determining eligibility and the EITC amount that can be taken, this credit can be as difficult to calculate as itemized deductions or depreciation. For this reason, taxpayers should let a tax preparation professional handle the preparation of their annual return.