Earned Income Tax Credit Lifts Millions Out of Poverty: What is it?

With the election day here, refundable tax credits are top of mind for many Americans since they remain a big part of  the debate over taxes and the IRS estimated that in 2009 the Earned Income Tax Credit lifted nearly $7 million people out of poverty.  For 2009 -2012 the Earned Income Tax Credit was temporarily increased for working families with 3 or more dependents.  Micheal Rubin explains what the Earned Income Tax Credit is and why you shouldn’t miss out on the valuable tax credit.

Earned Income Tax Credit

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a crucial tax benefit available for low to moderate income earners. It is also very important to those with larger families and relatively low or moderate incomes. Here are the guidelines for this important tax credit.

Income Limits

For the 2012 tax year, your earned income, and your adjusted gross income (AGI, the sum total of all of your earnings less certain deductions) must be less than:

  • $45,060 ($50,270 married filing jointly) with three or more qualifying children
  • $41,952 ($47,162 married filing jointly) with two qualifying children
  • $36,920 ($42,130 married filing jointly) with one qualifying child
  • $13,980 ($19,190 married filing jointly) with no qualifying children

If you make more than the relevant amount above, you won’t qualify for the EITC.  Also, if your investment income (like dividends and interest) exceeds $3,200, you’re not eligible for the EITC.

Earned Income Tax Credit Eligibility

In addition to earning less than the dollar amounts in the table above, you must have a valid Social Security Number, work for pay, and your filing status cannot be married filing separately in order to qualify for the EITC. There are other requirements including USA citizenship/resident alien status and limitations on investment and foreign income, but those are typically not issues for people eligible for the EITC.

Work for Pay

Unemployment income doesn’t help you qualify for the Earned Income Tax Credit. Neither does bank interest.  In order to receive any money via the EITC, you must work. You can have a traditional job as an employee or you can be your own boss and earn money from self-employment.  But one way or another, you’ve got to earn some money in order to qualify for the EITC.

Qualifying Children

As you can see above, the relevant income limits are much more generous if you take care of at least one qualifying child.  Your child qualifies if he or she meets all of the following conditions:

  • Has a valid Social Security Number
  • Is your child (natural, adopted or foster), grandchild, sibling, step-sibling, half-sibling, niece, or nephew
  • Younger than you and younger than 19, unless a student (in which case your child must be less than 24), or totally and permanently disabled (in which case there is no age limit)
  • Lives with you in the United States for more than half of the year
  • The child doesn’t file a joint tax return

TurboTax and the EITC Finder will help determine your eligibility for the Earned Income Tax Credit.

Maximum Credit for 2012

While the precise amount of your credit will largely be determined by your filing status, number of children, and income, there are maximum payable Earned Income Tax Credit amounts. For 2012, these are as follows:

  • $5,891 with three or more qualifying children
  • $5,236 with two qualifying children
  • $3,169 with one qualifying child
  • $475 with no qualifying children

What is a Refundable Tax Credit

Note that unlike many other tax credits, the EITC is a refundable tax credit. This means that the EITC can not only eliminate any income tax liability you might have, but if your credit exceeds your tax liability, you can also receive a tax refund for that amount. It is for this reason that the EITC is one of the most important tax considerations.

You will be able to file your 2012 taxes soon so don’t miss out on this valuable tax credit.  It just might mean an extra $2,000 or more in your pocket. Few other tax maneuvers can earn you that kind of cash!  TurboTax ask you the appropriate questions and correctly calculates the Earned Income Tax Credit if you are eligible.

Michael Rubin

Author of the bestseller Beyond Paycheck to Paycheck, and the upcoming The Savings Solution, Michael B. Rubin is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER professional. In addition to his experience providing sophisticated financial advice to affluent clients, Michael has been a key source of information for over a decade to countless others. He speaks passionately about and provides guidance on virtually all personal financial planning topics. Michael has appeared in various media, including radio and TV stations across the country, plus national media such as CNN Money.com, latimes.com, The Wall Street Journal, SmartMoney.com, Chicago Tribune, Financial Advisor Magazine, and Investment News. Prior to founding Total Candor LLC, Michael worked in the personal financial services practices of two of the former "Big Six" accounting firms. Subsequently working for several years as a new venture executive for Toys "R" Us, Inc., he made sure that he never actually grew up. He holds an undergraduate business degree from the Ross School of Business at the University of Michigan and an MBA from the Kellogg School of Management at Northwestern University. Michael lives in New Hampshire with his wife and children.

Comments (2) Leave your comment

  1. Is a disabled person that is not required to file a tax return for federal or state do they have to report winning a jackpot when you get a 1099-g playing on Indian slot machines? When I worked at a Indian casino people that was not disabled would have a disabled person claim the jackpot because they said since they was disabled they did not have to report the income from what I know of working in casino’s for about 6 years it would end up costing the disabled person all the taxes when the person that was not disabled got their half not having to pay any taxes. Of course if they got caught doing this the jackpot was paid to the person that won the jackpot just curious which one is true??

  2. I have a parttime job and earns just about $2,500 yearly. Is it ok for me to do income tax filing?idabel

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