The Earned Income Tax Credit (EITC) Explained: Who Qualifies and What Not to Do

by
Tim Owens, CPA
Updated 
November 16, 2022
November 16, 2022
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Reviewed by
Sarah York, EA
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Reviewed by
Sarah York, EA

Sarah is a staff writer at Keeper and has her Enrolled Agent license with the IRS. In 2022, she was named one of CPA Practice Advisor’s 20 Under 40 Top Influencers in the field of accounting. Her work has been featured in Business Insider, Money Under 30, Best Life, GOBankingRates, and Shopify. Sarah has nearly a decade of public accounting experience, and has worked with clients in a wide range of industries, including oil and gas, manufacturing, real estate, wholesale and retail, finance, and ecommerce. Sarah has extensive experience offering strategic tax planning at the state and federal level. During her time in industry, she handled tax returns for C corps, S corps, partnerships, nonprofits, and sole proprietorships. Sarah is a member of the National Association of Enrolled Agents (NAEA) and maintains her continuing education requirements by completing over 30 hours of tax training every year. In her spare time, she is a devoted cat mom and enjoys hiking, painting, and overwatering her houseplants.

The Earned Income Tax Credit (EITC) Explained: Who Qualifies and What Not to Do
by
Tim Owens, CPA
Updated 
November 16, 2022
November 16, 2022
Icon check
Reviewed by
Sarah York, EA

The Earned Income Tax Credit (EITC) is an often misunderstood tax credit available to many waged and self-employed Americans.

It’s claimed by over 25 million taxpayers every year. But many people aren’t if they qualify for it — or if they do, why they qualify for it.

Let’s explore the credit and everything you need to know about it.

Contents

What is the Earned Income Tax Credit?

The Earned Income Tax Credit (EITC) is a dollar-for-dollar reduction in your tax bill. It’s available for people with earned income below a certain threshold. (There are a few other requirements, which we’ll get into).

Here’s what you need to know about it.

It applies to earnings from W-2 or 1099 work

Earned income” just means any income that comes from working, whether it’s from a W-2 job or self-employment. (More on this later.)

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It’s refundable

In addition to reducing your taxes, the earned income credit is also refundable. That means if your credit amount is more than the amount of tax you owe, you’ll get the difference back as a tax refund.

It’s for low- to moderate-income workers and families

The credit exists to offer a tax break to people who are working, but potentially not making a  living wage. 

In particular, it’s designed to help workers trying to support their families on an inadequate income.

Who is eligible for the EITC?

Here’s a checklist from the IRS of everything you need to claim the Earned Income Tax Credit: 

  • ✓ Earned income from working — W-2 or self-employed
  • ✓ No more than $59,187 in adjusted gross income in 2022 (depending on your filing status and how many dependents you have)
  • ✓ Less than $10,300 in investment income (in 2022) 
  • ✓ A Social Security number
  • ✓ US citizenship or “resident alien” status
  • ✓ No foreign income·reported on Form 2555

Now, let me walk you through the requirements in detail.

Requirement #1: Earned income from working

Earned income includes:

  • ✓ Wages
  • ✓ Salaries
  • Tips
  • ✓ Net income from any self-employed activity

How earned income works for freelancers

For full-time freelancers, understand that your freelancing income counts as “earned income.” That means you're allowed to claim the EITC.

Just keep in mind the credit is calculated based on your net profit — meaning, after you take out any write-offs.

Say you run an online store that brought in $20,000 from sales in a year. It cost you $7,000 to run your store: 

  • 🛍️ Buying inventory
  • 🌐 Covering platform fees
  • 📸 Getting your goods photographed
  • 📦 Packing up your orders to ship

… and so on. After subtracting all those expenses, your net income is now $13,000.

That’s the income used to figure out if you qualify for the credit.

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What doesn’t count as earned income?

Earned income is the opposite of “unearned income”, which includes:

  • ✘ Investment income
  • ✘ Dividends
  • ✘ Stock sales
  • ✘ Passive income (like rents or royalties)
  • ✘ Government benefits

If your only income comes from sources like these, you don’t qualify for the EITC.

Requirement #2: Adjusted gross income under a specific threshold 

Your adjusted gross income (AGI) is just your income, minus any so-called “adjustments” that can lower it, including:

How the income threshold for the EITC works

For the 2022 tax year, the max amount of income you can have to qualify is $59,187. But your personal threshold will depend on two factors:

  • Your filing status
  • How many dependents you claim (up to three)

The $59,187 max is for a married couple filing jointly with three kids. Your threshold will actually be lower if you either:

  • Use a different filing status (single, Head of Household, or widow)
  • Are childless, or only have a kid or two

Here’s how the thresholds break down for 2022:

Children claimed Income limit (Single, Head of Household, or widow) Income limit (Married filing jointly)
0 $16,480 $22,610
1 $43,492 $49,622
2 $49,399 $55,529
3 $53,057 $59,817

And here are the 2023 thresholds:

Children claimed Income limit (Single, Head of Household, or widow) Income limit (Married, filing jointly)
0 $17,640 $24,210
1 $46,560 $53,120
2 $52,918 $59,478
3 $56,838 $63,398

Requirement #3: Investment income under a specific amount

Investment income includes both taxable and tax-exempt interest, plus capital gain distributions.

Note that your investment income counts towards your AGI total. So your total income has to be under the threshold for your circumstances, and your investment income has to be under $10,300 for 2022 (or $11,000 for 2023).

How the AGI and investment income limits work together

Here’s an example. Let’s say you’re a single mother and have one child. Your income limit would be $43,492. If you have $40,000 in income, your eligibility for the EITC can be different, depending on how that number breaks down:

  • ✓ If you have $40,000 combined from a day job and a freelance side hustle — all earned income — you qualify
  • ✓ If you have $38,000 in earned income and $2,000 in investment income, you qualify
  • ✘ If you have $28,000 in earned income and $12,000 in investment income, you do not qualify

In the third situation, your AGI is under the limit. But the $11,000 puts you over the limit for investment income.

Requirement #4: A valid Social Security number

Unfortunately, taxpayers who file with Individual Taxpayer Identification Numbers (ITINs) or Adoption Taxpayer Identification Numbers (ATINs) aren’t eligible.

This disqualifies undocumented taxpayers from claiming the credit.

Requirement #5: US citizenship or “resident alien” status

If you’re part of a married couple filing jointly, you and your spouse usually both have to be citizens or US residents.

Can you claim the EITC if you were a US resident for part of the year?

Potentially. You can only claim it if you’re married filing jointly, and:

  • One spouse is a US resident (or citizen)
  • The other spouse was in the US for at least six months that year

Note that this tends to happen the year you arrive in or leave the country

Requirement #6: Not filing Form 2555

This form reports foreign earned income to the IRS.

It’s used to claim the Foreign Income Exclusion. You qualify for this if your “tax home” is in another country, and you pay taxes there instead of in the US. 

Who doesn’t qualify for EITC?

In addition to not meeting the above requirements, two situations specifically disallow you from claiming the EITC:

  • ✘ Getting caught for trying to claim the credit when you didn’t qualify in past years
  • ✘ Not meeting specific eligibility requirements if you’re claiming the credit with no dependents

People who got denied for the EITC in a past year

You won’t qualify for the EITC for a number of years if you tried to claim it in the past, but got denied for not meeting the requirements. (This can include trying to claim dependents who don’t qualify.)

If that’s true of you, you won’t be able to claim the credit even if you do meet the requirements now.

How long are you prevented from claiming the EITC?

It depends on why you incorrectly tried to claim it:

  • 2 years for negligence (making a mistake)
  • 10 years for fraud

For example, say you tried to claim the credit in 2019. You got denied, because it turned out you weren’t supposed to claim a certain dependent on your return. You won’t be allowed to claim the EITC in 2020 or 2021 — even if your situation has changed to allow it.

People with no dependents who don’t meet certain requirements

If you do not have a qualifying child, you must:

  • ✓ Have lived in the US for more than half the year
  • ✓ Not be claimed as a qualifying child on someone else’s tax return
  • ✓ Be at least 19 years old by the end of the year

If you’re a childless taxpayer and don’t meet these three requirements, you can’t claim the credit. 

How much is the Earned Income Tax Credit?

The most you can get from the EITC is $6,935. Like your income threshold for qualifying, your amount depends on:

  • Your filing status
  • How many dependents you claim

Married couples get more. And the more children you claim, the higher your max credit.

The table below shows the maximum credit amount you can get and your income limitations for claiming the credit in 2022:

Children claimed Income limit (Single, Head of Household, or widow) Income limit: Married filing jointly Maximum credit
0 $16,480 $22,610 $560
1 $43,492 $49,622 $3,733
2 $49,399 $55,529 $6,164
3 $53,057 $59,817 $6,935

And here are the 2023 numbers:

Children claimed Income limit (Single, Head of Household, or widow) Income limit: Married filing jointly Maximum credit
0 $17,640 $24,210 $600
1 $46,560 $53,120 $3,995
2 $52,918 $59,478 $6,604
3 $56,838 $63,398 $7,430

As you can see, the income limit and maximum credit amount jump a significant amount once you include a dependent in the mix. That reinforces the point that — while this credit is available for all low-income workers — it’s mainly a source of support for families.

The full tables showing your Earned Income Tax Credit can be found here.

Who counts as a qualifying child for the EITC?

For the most part, a qualifying child for the EITC is very similar to how the IRS defines qualifying dependents in general. (They don’t necessarily have to be your child – or even a minor.) 

Here’s what those qualifications look like:

  • Age: The dependent must be under 19, or under 24 and a full-time student for at least five months out of the year. (In both scenarios they must also be younger than you). If they’re permanently disabled, they can be any age — even older than you
  • Relationship: A good general guideline is they must be a blood relation in your generation or below (son, daughter, brother, sister, niece, nephew, grandchild), or an adopted or foster child
  • Residency: They must live in the same home as you for more than half the year. That includes time spent away from the home temporarily (like while hospitalized or attending a boarding school)
  • Return filing: Your child can’t have been claimed as a qualifying child for the EITC on another return. They also can’t qualify to file a joint return with someone else (meaning, they can’t be married)

What happens if multiple people can claim the same child?

If more than two people can potentially claim the child, the tiebreaker rules go in this order:

  1. The parent
  2. Whoever the child lived with longer during the year
  3. The person with the highest AGI

Are there any downsides to claiming the EITC?

A credit that reduces taxes for someone who’s trying to support a household on a low income is obviously welcome assistance for those who truly need it. 

Still, there are a few aspects of claiming the EITC that you should be aware of.

These shouldn’t stop you from claiming the credit. Just watch out for who you trust to do your taxes.

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Possible delays in processing your tax return

This generally affects everyone who claims the credit. Depending on when or how you file, this delay can vary from a few days to over a month. (E-filing and getting it done early can help keep the delays shorter.)

Why EITC returns are processed more slowly

The delay isn’t an indication that you’ve done something wrong. It’s just that the EITC has been abused in the past. As a result, the IRS takes extra time to process returns that include it.

Potential audit risks if your info is wrong 

Like I mentioned, the EITC has been abused in the past — which means the IRS is on the lookout for anything fishy here.

It’s important to understand how it’s been abused to make sure you avoid those pitfalls on your return.

How the EITC was typically abused

The two most common ways EITC is illegally inflated are:

  • Claiming a dependent you aren’t entitled to
  • Reporting business income that didn’t actually exist

Historically, unethical tax preparers did the latter to game the system, so they could inflate refunds and line their own pockets.

How to avoid issues with your EITC

Good news: Most tax software will automatically compute your EITC based on the information you enter. So the concern isn’t that you’ll be calculating the credit wrong — not unless you’re doing your return completely by hand. 

That means you can avoid any EITC-related missteps by outsourcing your taxes to a tax filing software, like Keeper. These will automatically check if you — and your dependents — qualify. As long as the information you enter is accurate, you’ll be in the clear.

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If you’re working with a tax preparer, double-check that the information on your tax return matches what you give them. Never let anyone coerce you into stretching the truth for a few extra dollars.

How to claim the EITC

One of the great things about the EITC is that, if you are able to claim it, you’ll probably just get it by default.

As stated, most tax software (including Keeper!) will generate the proper forms for you automatically.

What to do if you’re claiming the credit by hand

Say you find yourself filing your return by hand (for whatever reason) and have to calculate the credit by hand as well. Then you’ll fill it out on line 27a of your 1040 return.

A blank Form 1040 with line 27a, for Earned income credit, circled in red

How to claim qualifying children if you’re filing by hand

If you’re claiming any children for the credit, make sure you include Schedule EIC with your return.

A blank Schedule EIC, used to fill out information on a qualifying child for the Earned Income Credit

This form is how you’ll provide information about the dependent children you’re claiming as part of the credit.

What happens if you qualify but forget to claim the credit?

If you’re entitled to the credit, but didn’t claim it when you filed your return, the IRS will normally send a notice.

Of course, the IRS can’t always catch everyone who slips through the cracks. So it’s best to do your own due diligence!

Don’t be afraid to claim this powerful tax break if you qualify — it’s money designed to help you and your family.

Tim Owens, CPA

Tim Owens, CPA

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Tim Owens is a Certified Public Accountant with over a decade of experience in tax, including many years as an auditor for the IRS. Throughout his career, he's worked with small businesses from every industry, from food service to entertainment to construction. He's passionate about helping the little guys not get screwed over by the system he was once a part of. When not doing taxes, he spends time with his wife and two children.

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