Tax Tips
Volume 8, Issue 3
For distribution 7/30/18; publication 8/2/18
Earned Income Credit - IRS Gives Free Money to Certain Taxpayers
I want free money!! How do I get it? Back in 1975, Congress approved this Earned Income Credit (EIC) to provide an incentive to working taxpayers. To qualify, you must meet certain requirements.
To receive earned income credit you must have earned income from employment (W-2), self-employment or another source of income. You don’t need to have children to qualify, but the more kids you have, the higher the credit. You can be single, head of household or married filing joint with your spouse to qualify.
EIC is an area that is highly audited with the IRS because it is abused often. There are fraudulent returns created every year and the IRS estimates between 21 to 26 percent of EIC credits are paid in error. It is such a big deal that that the IRS delayed refunds in 2017 in order to minimize the fraudulent returns filed. Thus, a good understanding of the rules is important because if a return is generated with EIC errors, the taxpayer would need to pay back the EIC with not only interest, but fraud penalties that could ban the person from EIC for the next 10 years. So what are the rules?
If you are married and have at least one child, there are 4 tests that you must meet to qualify:
- The relationship of the child (son/daughter/adopted child/stepchild/foster child/grandchild/sibling/niece/nephew)
- The age of the child (younger than you, younger than 19 or younger than 24 and a full-time student, or disabled)
- Residency (child must live with you in the US for more than ½ the year)
- Must file a joint return (child cannot file a joint return)
If you are married and have no children, you must meet 3 tests:
- You and your spouse must have lived in the US more than ½ the year
- You or your spouse must be between the ages of 25 and 64
- You or your spouse cannot qualify as a dependent of another person
In order to qualify in 2018, your adjusted gross income (AGI) must be less than:
- $49,194 for single or HOH filers ($54,884 married filing jointly) with 3 or more qualifying children
- $45,802 for single or HOH filers ($51,492 married filing jointly) with 2 qualifying children
- $40,320 for single or HOH filers ($46,010 married filing jointly) with 1 qualifying child
- $15,270 for single or HOH filers ($20,950 married filing jointly) with no qualifying children
Tax Year 2018 maximum credit:
- $6,431 with 3 or more qualifying children
- $5,716 with 2 qualifying children
- $3,461 with 1 qualifying child
- $519 with no qualifying children
Note that you also must have investment income (interest, dividends, capital gains) of $3,500 or less for the year in order to qualify for the credit.
60% of the errors in filing this credit are due to 3 things:
- Claiming a child who does not meet the age, relationship, residency or joint return test mentioned above
- Filing as a single or head of household when legally married
- Over or under reporting income or business expenses to maximize the credit
For more information, you can check out the IRS publication 596 here: http://www.irs.gov/pub/irs-pdf/p596.pdf
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Back in 1975, Congress approved this Earned Income Credit (EIC) to provide an incentive to working taxpayers. Find out more [link]
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