The Earned Income Tax Credit (EITC) is a credit for taxes, which means that eligible taxpayers will offset taxes they owe dollar for dollar as opposed to a deduction, which merely reduces a taxpayer's taxable income.
If the EITC exceeds the amount of taxes the taxpayer owes, the taxpayer will receive a tax refund. For 2012, the minimum EITC benefit is $475 and the maximum EITC benefit is $5,891.
Who is Eligible for EITC?
Only individuals, who have earned income from working either for a business or in self-employment are eligible for the EITC. Your wages, salary, tips, self-employment earnings or even long-term disability benefits received prior to the date you attain the minimum retirement age are considered earned income for purposes of the EITC. If an individual receives income from interest, dividends, pension proceeds, social security or unemployment benefits, alimony or child support, these do not count as earned income for purposes of the tax credit. In addition to having earned income, eligible individuals may not have earned income in excess of certain limits as described below.
Income Limits for EITC
The EITC is a credit designed to help low income taxpayers. Accordingly, the Internal Revenue Code contains limits on the amount of income an eligible taxpayer may earn and limits on adjusted gross income and still qualify for the EITC. These amounts are adjusted each year to reflect cost of living increases. The amounts are based on your filing status -- single or married filing jointly and the number of taxpayer's qualifying children. Moreover, both earned income and adjusted gross income cannot exceed these limits.
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For the 2012 taxable year, single taxpayers with no qualifying children cannot have earned income or adjusted gross income more than $13,980 or $19,190 for married couples filing jointly. For single taxpayers with one qualifying child, the limit is $36,920 or $42,130 for married couples filing jointly. Single taxpayers with two qualifying children may not have earned income or adjusted gross income equal to more than $41,952 or $47,162 for married couples filing jointly. Finally, for single taxpayers with three or more qualifying children, the limit is $45,060 or $50,270 for married couples filing jointly.
Rules for EITC and Dependents
In order to increase the amount of EITC that you are eligible for, your children must meet the requirements to be a qualifying child under the Internal Revenue Code. For a child to be considered a qualifying child for EITC purposes, the child must meet four tests: relationship, age, residency and joint return. The child must be your child, whether natural, adopted, stepchild, foster child or descendant of any of those. Additionally, the child may also be your sibling, half sibling, step-sibling or descendant of any of those. For the 2012 taxable year, qualifying children cannot: exceed age 19 as of December 31, 2012 if younger than you or your spouse if you are filing jointly; exceed age 24 as of December 31, 2012, if a student and younger than you or your spouse if you are filing jointly; or there is no age limit if the child is permanently and totally disabled during the taxable year.
Can You Get EITC with a Dependent if You Didn't Work?
If you did not work during the taxable year and therefore have no earned income, you will not be eligible to receive the EITC regardless of whether you have a dependent. A threshold requirement for the EITC is that the taxpayer must have earned income.