Earned Income Credit

The earned income credit (EIC) is a refundable tax credit, meaning the IRS treats it as a payment. Therefore, it can be used to offset tax liability or can simply be refunded to the taxpayer. The EIC is designed for lower income working families and individuals.

To even be eligible for the EIC, both earned income (wages plus net profits from self-employment) and adjusted gross income (found on Form 1040, Line 37) must be below certain levels. For 2012, both values must each be less than the following amounts:
-$45,060 ($50,270 married filing jointly) with 3 or more qualifying children1
-$41,952 ($47,162 married filing jointly) with 2 qualifying children;
-$36,920 ($42,130 married filing jointly) with 1 qualifying child; or
-$13,980 ($19,190 married filing jointly) with no qualifying children.

Furthermore, investment income must be less than $3,200 for 2012. Investment income includes interest, dividends, capital gains, and royalties.

In addition to income levels, EIC eligibility also hinges on satisfying the following criteria:
-Must have valid Social Security Number(s);
-Must be U.S. citizen or resident alien for the entire year;
-Cannot use the the married filing separately filing status;
-Taxpayer and spouse (if married) cannot be claimed as a qualifying child by someone else.
-Cannot claim Line 47’s foreign earned income exclusion (involves wages earned while living abroad)
-Taxpayer and spouse (if married) must be between the ages of 25 and 64.

Once qualified, taxpayers may either manually calculate their EIC amount or allow the IRS to do so. For calculation options, please consult Form 1040 Instructions (see pages 50, 53-72).

For additional general information regarding this detailed but extremely useful credit, please consult Publication 596, Earned Income Credit.

1The amount of the tax credit varies based on how many qualifying children are supporting within the taxpayer’s household. The rules for qualifying children for the purpose of claiming the EIC are similar, but slightly different, than the standard dependency rules. In order to list qualifying children for EIC purposes, taxpayers must satisfy certain criteria listed under Schedule EIC and attach the form with their return.

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