What is the Earned Income Tax Credit

The Earned Income Tax Credit (“EITC”) is a tax credit that is available to certain low-income families and individuals.  It is designed to provide some tax burden relief to those who are working but have low incomes.  In order to be eligible for the credit, the taxpayer must have income below a certain level.  Since it is a tax credit (as opposed to a deduction), it is a dollar for dollar reduction in your overall tax burden.  The EITC may even give you a refund on your tax return if the credit exceeds your tax burden for the year.

The amount of the EITC varies depending on the taxpayer’s number of qualifying children and their income level.  The amount changes each year, but for 2010, the maximum earned income amount for taxpayers with one qualifying child is $8,970, with two qualifying children the maximum is $12,590 and with no qualifying children the amount is $5,980.  This maximum earned income amount is reduced by a limitation based on the taxpayer’s income in order to determine the maximum earned income tax credit amount.  The maximum credit amount for 2010 is as follows:

– No qualifying child – $457

– 1 qualifying child – $3,050

– 2 qualifying children – $5,036

– 3 qualifying children – $5,666

The amount of the credit available is phased out for taxpayers over a certain amount of income depending on their filing status and number of qualifying children.  A qualifying child must meet certain relationship, residency and age requirements in order to be considered as a qualifying child. 

The credit is based on earned income of the taxpayer.  Earned income generally includes wages, salaries and tips as well as any net income from self-employment.  Earned income does not include interest and dividends, welfare benefits, verterans’ benefits, pensions or annuities, alimony, Social Security benefits, workers’ compensation or unemployment compensation as well as a few other limited types of income.

The IRS maintains a frequently asked questions (“FAQ”) on their website that addresses and answers many of the specific issues that come up in determining whether the EITC is applicable and whether the taxpayer is eligible for the credit (http://www.irs.gov/individuals/article/0,id=96466,00.html). 

The EITC is a very beneficial credit for those who are working and have lower income.  It is important to understand how the credit works and how it may help you.  It is important to try and follow and understand the rules surrounding the credit and to do some researching into how it is calculated for your particular circumstances.  Due to the way the IRS applies the credit, each person will have a different credit amount, so it is important to fully read through the IRS’ documentation on the credit itself (http://www.irs.gov/individuals/article/0,id=96406,00.html).  Assuming that you are eligible this is a great benefit to you in preparing your taxes for this year.  As always, if you have doubt about how to address this credit in preparing your taxes, do some checking online or ask a tax professional for some guidance to be sure you are on the right path.