What is Earned Income Tax Credit

the Earned Income Tax Credit (EITC), sometimes called EIC, is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who qualify and claim for the credit. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.

Who is eligible for EIC?

To claim EITC on your tax return, taxpayer must meet all the following criteria:

• Your filing status cannot be married filing separately;
• You, your spouse (if you file a joint return), must have a valid Social Security number for employment;
• You cannot file Form 2555 or Form 2555 EZ (related to foreign earned income);
• You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return;
• You cannot be a qualifying child of another person; and
• You must meet following requirement if you do not have at least one qualifying child (see who is a qualifying child below):
  • be age 25 but under 65 at the end of the year,
  • live in the United States for more than half the year, and
  • not qualify as a dependent of another person.

Who is a Qualifying Child for EIC?

The rules for qualifying children for the purpose of claiming the earned income credit are slightly different from the rules of dependents for personal exemption. Thus it may be possible that a child either qualifies as your dependent, but not for EIC; or might qualify as your child for EIC but not as your dependent just because the custodial parent sign a written declaration (form 8332).  A child may not be your dependent for personal exemption because of the self support test. However, he may still be your qualifying child for EIC purpose since there is no the support test for the EIC purpose. Here are the qualifying children rules for the earned income credit:

• Relationship Test: The child must be related to you by birth, marriage, adoption, or foster arrangement. The child can be your son, daughter, grandchild, niece, nephew, brother, sister, or eligible foster child. Adopted children are treated the same as children by birth. Foster children must be placed in your care by an authorized placement agency.
• Age Test: The child must be age 18 or younger at the end of the year, or the child must be age 23 or younger and a full-time student. If you care for a person who is totally and permanently disabled, you can claim this person for the Earned Income Credit regardless of the person’s age.
• Residency Test: The child must live with you in the U.S. for more than half the year. More than half a year means six months and a day. The residency test means that two people are not able to claim the same child for the Earned Income Credit.
• Joint return test:the child you claim for the earned income credit cannot file a joint return with his or her spouse. One exception is if their joint return is solely a claim for refund and the couple does not take any deductions or credits on their jointly-filed tax return.

Additionally, your child must have a valid Social Security Number. If your child does not have a valid SSN, then you cannot claim the child for the Earned Income Credit.

Investment Income & Earned Income Limitations

Investment income must be $3,200 or less for the year 2012. Investment income includes interest, dividends, capital gains, and royalties.

Earned income means wages you get as employees and net profits from self-employment. Wages include salaries and tips, union strike benefits, certain disability benefits received before your reach the minimum retirement age and are reported on Form W-2. Earned income from Self-employment is generally reported on Schedule C or on Schedule F for self-employed farmers.

To be eligible for EIC, both earned income and adjusted gross income (AGI) must each be less than the following amounts for 2012:

• $45,060 ($50,270 married filing jointly) with 3 or more qualifying children
• $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.

Earned Income Tax Credit Amounts for Year 2012

The maximum earned income credit for 2012 is:

• $5,891 with three or more qualifying children;
• $5,236 with two qualifying children;
• $3,169 with one qualifying child; and
• $475 with no qualifying children.

Here is our EITC calculator which can help you to calculate your earned income credit for 2012.