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Earned Income Tax Credit-A tax break for workers and families

Considered as one of the most successful welfare programs in the history of the United States, the Earned Income Tax Credit (EITC) was Introduced in 1975  and has been working as a tax refunding system that benefits low- and moderate-income working people by promoting personal employment. Through the EITC, working people can use the credit to reduce the owed taxes and increase refunds.

The way the EITC works, is that once you qualify, you can apply the credit toward your tax bill, or get a refund. For example, if you owe the U.S. Government $1.500 in taxes, and you qualify for $2.000, the U.S. Government will owe you $500 as a tax refund.

The amount you will get for income tax credit depends on the amount of children or relatives claimed, the filling status, and the adjusted gross income.

In order to qualify for the EITC the adjustments gross income and your earned income must be in the eligibility low to moderate parameters. These parameters are shown in the IRS EITC tables and the earned incomes to be considered for the eligibility are:

  •  Wages, salaries, tips
  •  Pay or received for gig work or contracting
  •  Union strike benefits
  •  Nontaxable combat pay
  •  Net earnings from self-employment.

The following types of income should not be considered earnings for the EITC eligibility:

  •  Interests and dividends
  •  Retirement and income
  •  Social security and unemployment benefits
  •  Alimony and child support.
  •  Pay received for work while in prison.

The IRS also offers a EITC Qualification Assistant that can be helpful when unsure if your income meets the qualifications.

Other requirements.

Besides the income there are other rules you must meet in order to apply:

  • Have a valid social security number:
    To qualify for the EITC, everyone you claim on your taxes must have a valid Social Security number (SSN). In order to be valid, the SSN must be: 

    •  Valid for employment
    •  Issued before the due date of the tax return you plan to claim (including extensions)
    • Social security cards with SSN and the words “Valid for work with DHS authorization” are allowed, while ITIN (Individual taxpayer identification numbers), ATIN (Adoption taxpayer identification numbers), and “not valid for employment social security cards” are not allowed.
  •  Have investment income below $3,650 in the tax year you claim the credit
  • File your tax return using one of the following statuses:
    • Married filing jointly: You can’t claim the EITC if your filing status is married filing separately
    • Filling status single
    • Head of household: You may claim the Head of Household filing status if you’re not married and pay more than half the costs of keeping up your home where you live with your qualifying child.
    • Qualify as widow or widower, meeting the following:
      • You could have filed a joint return with your spouse for the tax year they died. It does not matter if you filed a joint return.
      • Your spouse died less than 2 years before the tax year you’re claiming the EITC and you did not remarry before the end of that year
      • You paid more than half the cost of keeping up a home for the year
      • You have a child or stepchild you can claim as a relative. This does not include a foster child.
      • This child lived in your home all year, except for temporary absences.
      • U.S. Citizen or Resident Alien
        • To claim the EITC, you and your spouse (if filing jointly) must be U.S. citizens or resident aliens.If you or your spouse were a nonresident alien for any part of the tax year, you can only claim the EITC if your filing status is married filing jointly and you or your spouse is a:
          • U.S. Citizen with a valid Social Security number or resident alien who was in the U.S. at least 6 months of the year you’re filing for and has a valid Social Security number

Claim the EITC Without a Qualifying Child

If you (and your spouse if you file a joint tax return) meet the following rules, you are eligible to claim the EITC without a qualifying child:

  •  Meet the EITC basic qualifying rules previously mentioned
  •  Have your main home in the United States for more than half the tax year:
    •  U.S. possessions such as Guam, the Virgin Islands or Puerto Rico are not included as part of the United States for this rule.
    •  Not be claimed as a qualifying child on anyone else’s tax return Be at least age 25 but under age 65 at the end of the tax year (usually Dec. 31)

You are not eligible to claim the EITC if:

  • Your filing status is married filing separately
  •  You filed a Form 2555 (related to foreign earned income)
  •  You or your spouse are nonresident aliens.

Special rules:

Military

There are 2 additional rules you have to follow if you are a member of the military and claim the EITC:

  • Nontaxable Military Pay
    If you’re a member of the military, and you get nontaxable military pay such as combat pay or housing allowance, you can choose whether to include your nontaxable pay as earned income.
    If you and your spouse choose to include it, you may owe less tax and get a larger refund, but the person who includes your nontaxable pay as earned income must include all of it.
    The nontaxable pay includes: 

    • Combat pay
    • The Basic Allowance for Housing (BAH)
    • The Basic Allowance for Subsistence (BAS)

There are 4 ways you can include nontaxable pay when you claim the EITC:

  • Choose to include all your nontaxable pay while your spouse doesn’t include any of their nontaxable combat pay
  • Choose to include none of your nontaxable pay while your spouse includes all their nontaxable combat pay
  • Both choose to include all your nontaxable pay
  • Both choose not to include any of your nontaxable pay

Military Personnel Stationed Outside the United States
It is considered members of the military on extended active duty outside the Unites States to have their main home in the United States for tax purposes.

Clergy Member or Minister

If you are a clergy member or minister, you must:

  • Include the rental value of the home or housing allowance as part of your earned income from self-employment for the EITC, if it was provided by the church. The rental value is calculated as the money the church would get if they charged you rent.
  • Include income you get for working as a minister if you are an employee. This income includes:
    • Wages
    • Salaries
    • Tips
    • Other taxable employee compensation.

The income you get for working as a minister who is not an employee, such as self-employed wages, fees for performing marriages and honoraria for delivering speeches, should not be counted as an earned income.

Source: Earned Income Tax Credit (EITC) – IRS.gov

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