Earned Income Tax Credit

The earned income credit is a refundable tax credit designed for low-income families and individuals. The credit varies depending on your level of income and how many dependents you support. The tax credit can even generate a tax refund larger than the amount you paid in through withholding.

The easiest way to find out if you qualify for the earned income credit is to use an application found on the IRS Web site called the EITC Assistant. There's a qualifications applet for each tax year, so be sure to click on the right year.

More quick links to the IRS Web site:

• Publication 596, Earned Income Credit
• Schedule EIC [pdf]
• Additional information about the EIC

To be eligible for the earned income credit, both your earned income and adjusted gross income needs to be within certain ranges. The amount of the tax credit varies based on your earned income and how many qualifying children you are supporting in your household.

Advance Earned Income Credit

If you qualify for the earned income credit, you can receive part of the credit during the year with your paycheck instead of waiting until tax time to receive the entire amount. This is called the Advance Earned Income Tax Credit. For TY 2008, your employer can provide you with up to $1,750 in advance EIC credits.

Tax Credit Amounts for Year 2008

The maximum earned income credit for 2008 is:

• $4,824 with two or more qualifying children;
• $2,917 with one qualifying child; and
• $438 with no qualifying children.

Earned Income & Investment Income Limitations

Earned income means wages and net profits from self-employment. Wages are reported on Form W-2. Self-employment is generally reported on Schedule C or Schedule C-EZ.

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

• $38,646 ($41,646 married filing jointly) with two or more qualifying children;
• $33,995 ($36,995 married filing jointly) with one qualifying child; or
• $12,880 ($15,880 married filing jointly) with no qualifying children.

Investment income must be $2,950 or less for the year. Investment income includes interest, dividends, capital gains, and royalties.

Who is a Qualifying Child for EIC?

The rules for qualifying children for the purpose of claiming the earned income credit are slightly different than the rules for dependents. Thus it may be possible that a child qualifies as your dependent, but not for EIC; or would qualify you for EIC even though the non-custodial parent claims the dependent. Here are the qualifying children rules for the earned income credit:

• Relationship test,
• Age test, and
• Residency test.

To claim a qualifying child or children you must attached Schedule EIC to your Form 1040.

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 for more than half the year and must live with you in the United States. 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.

Additionally, your child must have a valid Social Security Number, individual tax identification number (ITIN), or adoption tax identification number (ATIN). If your child does not have a valid SSN or tax id number, then you cannot claim the child for the Earned Income Credit.

Finally, you cannot claim the earned income tax credit if your filing status is Married Filing Separately. However, if you and your spouse are separated and your spouse did not live with you at any time during the last 6 months of the year, you can file as Head of Household and claim the Earned Income Credit.

EIC Requirements for All Taxpayers

To be eligible for the earned income credit, taxpayers need to meet the follow criteria:

• Must have valid Social Security Numbers;
• Must be U.S. citizen or resident alien for the entire year;
• Cannot use the the married filing separately filing status;
• You and your spouse (if married) cannot be claimed as a qualifying child by someone else.
• Cannot claim the foreign earned income exclusion (which relates to wages earned while living abroad)
• You and your spouse (if married) are between the ages of 25 and 64.