EARNED INCOME TAX CREDIT

The earned income tax credit, or EITC, is a refundable credit for workers who meet certain requirements and file a tax return. Persons with or without a qualifying child may claim the EITC. The maximum credit is $2,853 for persons with one qualifying child, and $4,716 for persons with two or more qualifying children. The maximum credit is $428 for persons without a qualifying child. The following requirements apply to all taxpayers who may be eligible for the EITC.

To claim the earned income tax credit, you must have earned income.  Earned income includes all income from employment, but only if it is includible in gross income. Examples of earned income are wages, salaries, tips, and net earnings from self–employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.

If you have investment income of more than $2,900, you may not claim the EITC. Investment income includes taxable interest, tax exempt interest, dividend income, capital gain net income, certain income from rents or royalties, and certain income from passive activities. It does not include gains from selling business assets.

To claim the EITC, your filing status must be single, head of household, qualifying widow or widower, or married filing jointly. You cannot claim the EITC if your filing status is married filing separately.

There are three more requirements you must meet to claim Earned Income Tax Credit; age, dependency, and residency. To claim the EITC, you (or your spouse, if filing jointly) must be at least 25, but under age 65, if you have no qualifying children as of December 31st. If someone else can claim you (or your spouse, if filing jointly) as a dependent on their return, you cannot claim the EITC. If someone else can claim you (or your spouse, if filing jointly) as a dependent, but does not, you still cannot claim the EITC. To claim the EITC, you (and your spouse, if filing jointly) must live in the United States for more than half the year. Military personnel stationed outside the United States on extended active duty are considered to live in the United States during that period for EITC purposes.

A qualifying child is a child who meets certain relationship, residency, and age requirements.  The child must be your son, daughter, adopted child, grandchild, stepchild, or eligible foster child. Your brother, sister, stepbrother, or stepsister (or a descendant of your brother, sister, stepbrother, or stepsister) may also be a qualifying child if you care for this individual as you would your own child.  An individual is an eligible foster child if the child is placed with you by an authorized placement agency and whom you cared for as you would your own child. Your child or foster child must have lived with you in the United States for more than half the year. Your child must be under age 19 at December 31st (or under age 24 at December 31st and have been a full–time student during the tax year), or any age if permanently and totally disabled.

Your qualifying child must have a valid social security number issued by the Social Security Administration. If your qualifying child does not have a social security number or if your child's social security card reads "not valid for employment" and the number was issued so that the child could receive a federally funded benefit, such as Medicare, you cannot claim the EITC on the basis of that qualifying child.

If two or more persons are able to claim the same qualifying child, you can choose which person will claim the Earned Income Tax Credit using that qualifying child.  If the parties cannot agree upon who will claim the tax credit, the "tie-breaker rules" will be applied as follows: 1) If only one of the persons is the child's parent, then the parent can treat the child as qualifying. 2) If two of the persons are the child's parent and they do not file a joint tax return, then the parent with whom the child lived with longest during the year can treat the child as qualifying. 3) If two of the persons are the child's parent, they do not file a joint return, and the child lived with each parent for the same amount of time during the year, then the parent with the higher adjusted gross income (AGI) can treat the child as qualifying. If non of the persons are the child's parent, then the person with the highest (AGI) can treat the child as qualifying

For 2007, to claim the EITC, your earned income must be less than $12,590 ($14,590 if married filing jointly), if you have no qualifying children, $33,241 ($35,241 if married filing jointly), if you have one qualifying child, or $37,783 ($39,783 if married filing jointly) if you have two or more qualifying children.

Most people can use a worksheet in the instructions for Form 1040, 1040A, or 1040–EZ to figure this credit. People with more complex returns are required to figure their credit using a worksheet in Publication 596, or the IRS can figure the credit for you. If you want the IRS to figure the credit, carefully follow the steps in the instructions for your form or refer to Publication 596. This publication is also a valuable source for general information on the earned income tax credit.

The IRS Website provides an EITC Assistant Calculator to help taxpayers determine the amount of their Earned Income Tax Credit for 2007. To access this calculator, select the link below.  When you arrive at the IRS webpage "2007 Earned Income Tax Credit (EITC) - should I Apply?" Click on "Start Here: Am I Eligible?" and follow through the screens, clicking COMPLETE after answering all questions. If the answer to any question is zero, enter "0".  At the end of your session, a results screen will appear that will tell you the amount of EITC that you may be eligible to receive for the 2007 tax year.

If you expect to qualify for the EITC in 2008, you may be able to receive part of it in advance during the year. To see if you qualify to receive advance EITC, and for other EITC questions, refer to Publication 596 or consult your tax advisor.

EITC Assistant Calculator link

Publication 596 link