Understanding the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable tax credit aimed at supporting workers with children, and in some circumstances may even apply if you don’t have qualifying children. It reduces the amount of tax owed, and may even result in a refund.

Eligibility Criteria

To qualify for the EITC, taxpayers must meet specific requirements:

• Income Limits: Adjusted gross income (AGI) must be below certain thresholds, which vary based on filing status and number of dependents.  To see specifics on those income limits please see this IRS page.

• Investment Income: Investment income must also be below a specified limit.

• Social Security Number/Citizenship: A valid Social Security number is required for all individuals listed on the tax return, and taxpayers must be U.S. citizens or resident aliens for the entire tax year.

• Filing Status: Certain filing statuses, such as married filing separately, may disqualify taxpayers from claiming the EITC. To learn more, read here.

Claiming the EITC

To claim the EITC, eligible taxpayers must file a federal tax return, even if they owe no tax or are not required to file. The EITC has been a significant help to families in the USA. However, it's estimated that around 20% of eligible taxpayers do not claim the credit, often due to lack of awareness.

What is the difference between a tax credit and a deduction?

A tax credit directly reduces the amount of tax owed, dollar for dollar, making it more valuable than a deduction of the same amount. In contrast, a tax deduction lowers taxable income, which in turn reduces the amount of tax owed based on the taxpayer’s marginal tax rate. For example, a $1,000 tax credit reduces the tax bill by $1,000, while a $1,000 deduction lowers taxable income, resulting in a smaller tax savings depending on the tax bracket. Tax credits can be refundable, meaning they can generate a refund if they exceed the tax owed, whereas deductions only reduce taxable income. 

Conclusion

The EITC is an opportunity for tax saving eligible taxpayers won’t want to miss out on. Reach out to Visibility today to learn if you qualify for this valuable credit!