What is the Earned Income Credit?
The Earned Income Credit (EIC) is a tax credit for low to moderate income earners. In order to qualify for the Earned Income Credit, you must file a tax return, even if you are not required to file taxes. Those who file for an Earned Income Tax Credit may receive a tax refund if their taxable income is less than the credit.
Qualifications for the Earned Income Credit include:
- Earned income by working for someone else, or by owning your own business
- Meet the rules for a qualifying child
- Meet certain income levels (You can find those levels on the IRS site.)
- File as Married filing jointly, Head of household, Qualifying widow or widower, or Single. If you file as married filing separately, you do not qualify for the Earned Income Credit.
Earned Income Scenario
Jerry and Ellen Johnson are husband and wife; they have two children. Jerry works for an established company as a contractor and Ellen just started her own Etsy business. Together, Jerry and Ellen earn $50,000 a year.
The Johnsons file as married filling jointly on their personal taxes. This means that they file their total income on one tax return. Jerry and Ellen claim the Earned Income Credit because they earn less than the two child max of $50,198 a year.
By filing for the earned income credit they are able to lower their taxable income on their personal taxes. They may even be eligible for a tax refund after they count any other deductions or credits.
The Earned Income Credit only applies to Jerry and Ellen’s personal taxes. When Ellen files her business taxes for the business she owns she will not include the Earned Income Credit.