Earned Income Credit

Earned income credit is a tax credit that is designed and aimed at helping the low income working population. In addition, it gives the low income an incentive to continue working rather than collecting welfare. Anyone who meets the tests and requirements may claim the credit as long as their filing status is not married filing separate.

To claim the credit you must first have a valid social security number for yourself and anyone you are claiming as a spouse or dependent on your tax return. The next requirement to claim the credit is that you must have earned income. This means must have earned wages from a job, from self employment, or as a statutory employee. In addition, you must not have more than $3,100 of investment income for the claiming year.

If you meet the previous requirements then there are additional requirements or tests to be met depending on your particular situation and filing status.

The first test is the age test.

Qualifying taxpayers must be 25 years of age or older to get the credit, with the following exceptions. If they are claiming qualifying children, in which case the qualifying children must be younger than the taxpayer. The exception to this rule of children be younger  is that the qualifying dependent must be totally and permanently disable to qualify. For example, a 24 year old taxpayer could qualify for earned income credit by claiming their totally and permanently disabled older sibling for which they care for and support. Another age test for children is they must be 19 or younger unless they are a student any part of 5 months of the corresponding tax year, with the exception to the disabled qualification. As long as they are a student any part of 5 months of the tax year, they may be claimed for earned income credit purposes up to the age of 25. They must still meet all other test requirements.

The second test is the relationship test.                                                                               

Each qualifying child must be the taxpayer(s)

Son.daughter, stepchild, foster child, grandchild, brother, sister, half or step brother or sister, or any other descendent of such as niece or nephew.

The third test is the residency test.

The qualifying child must reside with the taxpayer over half of the year and must reside in the US. There are of course exceptions to this rule also. For example, the child may qualify if from home for school purposes.

The final test is the income test.

For the 2010 tax year the earned income allowed amounts are as follows.

If filing as a single person, your (AGI) adjusted gross income must not be more than $13,460. This amount increases to $18,470 if you are filing married joint with no children.

For persons filing taxes with dependent children the maximum amounts of earned income allowed for the credit are as follows.  Taxpayers with one qualifying child must not have more than $35,535 (AGI) if filing single or head of household or $40,545 (AGI) if filing married joint.

For taxpayers with two qualifying children the (AGI) must not be more than $40,363 if filing single or head of household with two qualifying children. This amount increases to $45,373 if filing joint.

Taxpayers filing single or head of household with three children can have an (AGI) up to $43,352. The allowed (AGI) amount increases to $48,362 if filing married joint.

Earned income credit is figured according to your earned income. Basically the less you make, the less the credit. Then on the flip side the more you make the less the credit. Basically, the credit works like driving up hill. If your at the bottom of the hill your credit is less. The higher up the hill you go the more the credit increases until you get halfway up to the allowable (AGI) and meet the maximum earned income credit. Then the more you make the credit starts going down again until it reaches zero at the maximum (AGI) allowed for the credit.

For the 2010 tax year the maximum earned income credit amounts are as follows.

$457 with no qualifying children                                                                            

$3,050 with one qualifying child                                                                              

$5,036 with two qualifying children                                                                                 

$5,666 with three or more qualifying children

The allowed earned income credit amounts stops with three qualifying children and remains the same regardless of if there are three qualifying children or ten.

A complete list of qualifications, rules and exceptions can be found in IRS publication #596. This may be obtained by calling the IRS at 800-829-3676. To obtain a quick copy, most public libraries have limited copies if you inquire. In addition, you may find this information on the IRS website at IRS.GOV. In the search box type in Earned Income Credit, then click on the link titled EITC Income, Limits, Maximum Credit Amounts and Tax Law Updates.