• CPA Next Door

One in six qualify for this tax credit but may not know it.

Earned Income Tax Credit

You may have heard people mention they had a refund on their tax return they were not expecting, and it was due to the Earned Income Tax Credit (EITC). This credit is more common than many people may realize, with 1 in 6 taxpayers qualifying to claim it (though many do not realize that they do).

Let’s start out with what is the EITC? It is a refundable credit that is created by Internal Revenue Code Section 32. This type of credit allows individuals to claim it and get a tax refund, even if they owe zero tax and did not have any withholding taken from their W-2 or another type of earned income. Now, that we know what the EITC is, let’s focus on how its phase-out calculated.

The Earned Income Tax Credit starts as you may expect, with it being equal to a percent of the taxpayer’s earned income up to a maximum earned income threshold. Once the income threshold is met the tax credit starts to be reduced over the phaseout range. The phase-out income range changes every year and is based on the number of children. The calculation is different for taxpayers with zero to 3 children (those with more than 3 children have the same calculation as those with 3).

There are types of income that will disqualify the taxpayer from being able to take the credit. This can be generally thought of as investment income which includes things such as dividends and interest. The amount of investment income a taxpayer can receive also increases every year similar to the phase-outs mentioned earlier.

#EITC, #EarnedIncomeTaxCredit

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