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The Earned Income Credit

The American Taxpayer Relief Act of 2012 (American Taxpayer Relief Act) makes permanent or extends enhancements to the earned income tax credit (EITC) provided by Bush-era and subsequent legislation. These enhancements include a simplified definition of earned income, reform of the relationship test and modification of the tie-breaking rule.

The EITC is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify for the EITC, you and your spouse if married and filing a joint return, must meet all of the following rules:

  • have a valid Social Security Number;
  • have earned income from employment, self-employment or another source;
  • cannot use the married, filing separate filing status;
  • must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien;
  • cannot be the qualifying child of another person;
  • cannot file Form 2555 or 2555-EZ (related to foreign earned income);
  • your adjusted gross income and earned income must fall below certain limits; and
  • your investment income must not exceed certain income limits.

If you meet the EITC rules listed above, you must also meet the rules for either workers without a qualifying child or have a child that meets the qualifying child rules. The qualifying child rules require that your child live with you and pass the relationship, age, residency, and joint return tests. All four tests must be met for each child you claim.

Due to the potential for abuse of this potentially large credit, in many circumstances the IRS requires extra documentation. Please see our EIC Worksheet<.

In addition, there are special EITC rules for members of the military, ministers, members of the clergy, those receiving disability benefits and those impacted by disasters.

The changes provided by the American Taxpayer Relief Act are intended by Congress to support working individuals and families. We can review your tax situation to make sure you receive the full tax benefit of this credit. Please call our office for an appointment.