EARNED INCOME CREDIT

What is the earned income credit (EIC)?

The earned income credit (EIC) is a refundable tax credit available to certain low-income working individuals who earned income during the year and who had less than a specified amount of investment income. This credit reduces the amount of federal tax you owe. If you file a tax return and meet all applicable requirements for the EIC, your tax liability will be reduced and you may receive a refund.

How do you qualify for the EIC?

To qualify for the EIC, you must meet the requirements summarized in the table below. You must meet all of the requirements contained in Part A of the table. In addition, you must meet all of the rules contained in Part B if you have a qualifying child; if you do not have a qualifying child, you must meet the requirements in Part C. Finally, you must also fall within the income guidelines in Part D. 

Part A: Requirements for everyone

You (and your spouse, if applicable) must have a valid Social Security number. You must have earned income.

Your disqualified income must be $3,100 or less in 2009. Your filing status cannot be married filing separately.

You must be a U.S. citizen or resident alien all year. You cannot file Form 2555 or 2555-EZ (relating to foreign earned income). Neither you nor your spouse can be a qualifying child of another taxpayer.

Part B: Requirements if you have a qualifying child
Your child must meet the relationship, age, and residency tests
You must attach Schedule EIC to your return
Your qualifying child must have a Social Security number
If your qualifying child is also the qualifying child of another taxpayer, special rules apply

Part C: Requirements if you don't have a qualifying child
You (or your spouse, if filing a joint return) must be at least age 25 but under age 65
Neither you nor your spouse can be eligible to be claimed as a dependent on another taxpayer's return
Your main home must be in the United States for more than half of the year.

Part D: Income guidelines
For 2009, your earned income and adjusted gross income (AGI) must each be less than:
$13,440 if you do not have a qualifying child ($16,560 if married filing jointly) $35,463 if you have one qualifying child ($38,583 if married filing jointly) $40,295 if you have more than one qualifying child ($43,415 if married filing jointly)

Earned income defined
The refundable EIC is available only if you work and have earned income. If you're married and file a joint return, either you or your spouse must work and have earned income. You may either work for someone as an employee or have your own business. Earned income includes all income you earn from working that is includible in gross income.

Earned Income:

Not Earned Income:

Wages, salaries, and tips
Union strike benefits
Long-term disability benefits received prior to minimum retirement age
Net earnings from self-employment

Interest and dividends Social Security and railroad retirement benefits Pensions or annuities Veterans benefits Workers' compensation benefits Alimony Child support Unemployment compensation (insurance) Earnings for work performed while an inmate at a penal institutionGiftsWelfare benefits and workfare payments Voluntary salary deferralsNontaxable combat zone payBasic quarters and subsistence allowances and in-kind quarters and subsistence from the U.S. militaryThe value of meals or lodging provided by an employer for the convenience of the employerHousing allowance or rental value of a parsonage for the clergyExcludable dependent care benefitsVoluntary salary reductions such as those under a cafeteria plan

Disqualified income defined
You cannot claim the EIC if your disqualified income for the year exceeds $3,100 in 2009. Essentially, disqualified income refers to investment income. Disqualified income consists of:

  • Taxable interest and dividends
  • Tax-exempt interest (e.g., from municipal bonds)
  • Net income from nonbusiness rents and royalties (gross income less deductions and interest related to such income)
  • Capital gain net income
  • Net passive income

Qualifying child defined
A uniform definition of a qualifying child applies to all child-related tax benefits, including the EIC. Under the uniform definition, a qualifying child for the purposes of the EIC must meet all of the following tests:

  • The child has the same principal abode as the taxpayer for more than half the year (temporary absences due to special circumstances are not treated as absences)
  • The child must be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendent of such individuals. A child who is legally adopted by, or lawfully placed for adoption with the taxpayer is a qualifying child. A foster child who is placed with the taxpayer by an authorized agency, judgment, decree, or other such order is also a qualifying child.
  • The child must be under age 19 (or under age 24 in the case of a full-time student
What if two or more persons may be able to claim a child for purposes of the credit?

If a child would be a qualifying child with respect to more than one individual (e.g., a child lives with his or her mother and grandmother in the same residence) and more than one person claims a benefit for the child, then the following tie-breaking rules apply:

  • If only one of the individuals claiming the child as a qualifying child is the child's parent, the child is deemed the qualifying child of the parent
  • If both parents claim the child and the parents do not file a joint return, then the child is deemed a qualifying child of: (1) the parent with whom the child resides for the longest period of time, or (2) if the child resides with both parents for the same amount of time, of the parent with the highest adjusted gross income
  • If the child's parents do not claim the child, then the child is deemed a qualifying child with respect to the claimant with the highest adjusted gross income

If you're married, what are your filing status options?

If you're married and wish to claim the EIC, you generally must file a joint return with your spouse; you cannot qualify for the EIC if you file married separately. Head of household filing status is also acceptable, however, if you meet the requirements.

Computing the EIC

If you qualify for the EIC and your EIC exceeds the amount of federal income taxes you owe, you may receive a refund. To compute the amount of your EIC, follow the instructions for your Form 1040, 1040A, or 1040EZ (and complete Schedule EIC if you have one or more qualifying children). The maximum amount of the EIC in 2009 is $457 if you have no children, $3,043 if you have one qualifying child, $5,028 if you have two qualifying children, and $5,657 if you have 3 or more qualifying children.

The amount of your credit will begin to phase out once your AGI (or earned income, if greater) reaches the following levels in the year 2009:

Married filing jointly

All others

No qualifying children

$12,470

$7,470

One or more qualifying children

$21,420

$16,420

You will be ineligible for the EIC once your AGI (or earned income, if greater) reaches the following thresholds for the year 2009:

Married filing jointly

All others

No qualifying children

$18,440

$13,440

One qualifying child

$40,463

$35,463
Two qualifying children $45,295

$40,295

Three or more qualifying children

$48,279

$43,279

What is the advance EIC?

If you're eligible to claim the EIC and have at least one qualifying child, you can elect to receive part of the credit (in advance) in your paycheck during the year. To qualify for the advance EIC:

  • Your earned income and AGI must be below the income limits
  • You must complete Form W-5 (Earned Income Credit Advance Payment Certificate) each year and give it to your employer

Advance payments are limited to 60 percent of the maximum credit for a taxpayer with one qualifying child. Form 1040 must be filed to report advance payments received during the year.

Caution:  If you fraudulently claim the EIC, you will be ineligible for it for 10 years. If you claim the EIC due to reckless or intentional disregard of the rules, you will be ineligible for 2 years.

Alternative minimum tax considerations

In the past, a taxpayer's alternative minimum tax liability would reduce the amount of his or her refundable EIC. Since 2002, however, the EIC is no longer reduced by the amount of your alternative minimum tax liability.

For more information about the EIC, see IRS Publication 596.