What Is the Earned Income Tax Credit? (2024)

Investment income can't exceed $10,300 as of tax year 2022. This includes interest, dividends, capital gains, and royalties. It might be reported on a 1099-MISC or, for dividends, on Form 1099-DIV. The institutions that hold your investments or accounts should send you copies of these forms shortly after the first of the year.

Pros and Cons of the Earned Income Tax Credit

Pros Explained

• It provides tax relief to workers with low-to-moderate incomes: The eligibility requirements of the EITC are designed to give more money to those who need it most. The hope is that the EITC will also help reduce poverty and make the tax code more fair.
• It's fully refundable: Even if you don't owe any taxes, you can get cash back from the federal government for the full amount of the credit that you qualify for.

Cons Explained

• You may wait longer for your tax refund: The Protecting Americans from Tax Hikes (PATH) Act requires the IRS to hold refunds for taxpayers who claim this credit until mid-February each year. This allows the government some time to investigate the possibility of fraudulent claims, but it also means that some Americans will have to wait longer for their tax refunds. The IRS says not to expect a refund until March 1.
• It can be difficult to calculate: The EITC is among the most complicated tax credits to calculate—if not the most complicated. Common errors that people make include claiming a child who does not qualify, filing as single when married, reporting incorrect expenses, and inaccurately reporting Social Security numbers.

Requirements for the Earned Income Tax Credit

You must attach Schedule EIC for the appropriate tax year to your Form 1040 to claim a qualifying child or children for purposes of the EITC. Taxpayers must meet a few other rules to be eligible to claim this credit as well:

• You must have a valid Social Security number.
• You must be a U.S. citizen or a resident alien for the entire year.
• You can't claim the foreign earned income exclusion, which relates to wages earned while living abroad.

Additional rules apply if you don't have a qualifying child:

• You (and your spouse if you're married) can't be claimed as a qualifying child by anyone else.
• You and your spouse, if you file jointly, must be at least 19 years old (24 if you're a specified student or 18 if you're a qualified former foster youth or qualified homeless youth).
• You must have lived in the U.S. for more than half of the year.

Finally, you can't claim the EITC if your filing status is married filing separately.

If the IRS disallows your claim for the EITC, you'll have to file Form 8862 with your next tax return to reclaim your eligibility.

Requirements for Qualifying Children

The rules for qualifying children for the EITC are slightly different from those for claiming dependents, in general. The rules for qualifying children for EITC purposes are based on four tests:

• Relationship: The child must be related to you by blood, marriage, or adoption, or must live with you under a foster arrangement. The child can be your son, daughter, stepchild, grandchild, niece, nephew, brother, sister, half brother, half sister, stepbrother, stepsister, or an eligible foster child. Adopted children are treated the same as children by birth, and foster children must be placed in your care by an authorized placement agency.
• Age: The child must be under age 19 at the end of the tax year, or a full-time student for at least five months of the year and under age 24. You (or your spouse if you're married and filing jointly) must be older than your dependent in these situations. However, age doesn't matter if your dependent is permanently disabled.
• Residency: The child must live with you in the United States for more than half of the year (at least six months and one day).
• Joint Return: A child you claim as a dependent for purposes of claiming the EITC cannot claim any credits, including the EITC in a joint return they file with their spouse. They can file a joint return solely to claim a refund on taxes they have withheld from their paycheck.

The child must also have a valid Social Security number issued before the date of your tax return, including any extensions that you request. You can start an application for a Social Security number online, but you will have to follow up with supporting paperwork within 45 calendar days.

Consider asking the IRS for an extension of time to file if the tax deadline is looming, and you don't yet have your child's Social Security number. Requesting an extension is a simple matter of filing Form 4868 on or before Tax Day, which will give you until October 15 to file your return.

Frequently Asked Questions (FAQs)