FSS Newsletter :: January 2002

The Earned Income Tax Credit

The earned income tax credit (EIC) was enacted in 1975 to provide working, low-income taxpayers with children some relief from the Social Security tax, and to improve incentives to keep working. The emphasis here is on low-income taxpayers -- but, in many cases, the term "low-income" is really in the eye of the beholder.

Q. What is the Earned Income Tax Credit (EITC)?

A. The Earned Income Tax Credit (EITC) is a refundable Federal tax credit for eligible individuals and families who work and have earned income under $32,121. The EITC reduces the amount of tax you owe, and it may give you a refund or a much larger refund than you would have had otherwise.

Q. Who can claim the credit?

A. To claim the EITC on your 2001 tax return, you must meet all of the following rules:

1. You must have earned income during the year.
   
2. Your earned income and modified AGI must each be less than:
   
   1. $10,710 if you have no qualifying children, or;
      
   2. $28,281 if you have one qualifying child, or;
      
   3. $32,121 if you have more than one qualifying child.
      
3. Your investment income cannot be more than $2,450.
   
4. Your filing status can be any filing status EXCEPT married filing a separate return.
   
5. You cannot be a qualifying child of another person. If you are filing a joint return, neither you nor your spouse can be a qualifying child of another person.
   
6. Your qualifying child cannot be the qualifying child of another person whose modified AGI is more than yours.
   

Additionally, to claim the EITC, you must have a Social Security Number (SSN) for you, your spouse (if filing a joint return), and your qualifying child.

Q. What is Earned Income?

A. Earned income includes all the income and wages you get from working — even if it is not taxable.
There are two ways to get earned income:

• You work for someone who pays you, or;
  
• You work in a business you own.
  

Taxable earned income includes:

• Wages, salaries, and tips;
  
• Union strike benefits;
  
• Long-term disability benefits received prior to minimum retirement age;
  

Q. How do I figure my credit?

A. Once you know that you qualify for the EITC, you need to know how to figure the amount of the credit. You have two choices of how to figure the credit:
Have the IRS figure the credit for you. If you would like the IRS to do this, see Publication 596, Earned Income Credit, or Figure the credit yourself. To do this you must use the Earned Income Credit Worksheet (EIC Worksheet) in the instruction booklet for Form 1040, Form 1040A, or Form 1040EZ, and the Earned Income Credit (EIC) Table in the instruction booklet.

Q. Where can I get more information?

A. Publication 596, Earned Income Credit, explains the rules to qualify for and to claim the EITC and Advance EITC. A free copy of IRS forms and/or publications is available for download or by calling the Internal Revenue Service at 1-800-829-3676.