What’s Earned Income Tax Credit?

Earned Income Tax Credit or EITC also called as EIC is an important benefit for working people who have low to moderate income. The EIC is a refundable credit, enacted as a work incentive in the Tax Reduction Act of 1975. It provides a financial boost to working individuals and families. It has become one of the primary forms of public assistance for low income working taxpayers. A tax credit means more money in your pocket. It reduces the amount of tax you owe and may also give you a refund. Eligibility for the EIC is based on the taxpayer’s earned income, adjusted gross income, investment income, filing status, and work status in the United States. The amount of the EIC is based on the presence and number of qualifying children in the worker’s Tax income family, as well as on adjusted gross income and earned income.

The earned income credit generally equals a specified percentage of earned income up to a maximum dollar amount. Earned income is defined as wages, salaries, tips and other employee compensation, but only if such amounts are includible in gross income, plus the amount of the individual’s net self-employment earnings. The maximum amount applied over a certain income range and them diminishes to zero over a specified phase-out range. For taxpayers with earned income (or adjusted gross income(“AGI”), if greater) in excess of the beginning of the phase-out range, he maximum EIC amount is reduced by the phase-out rate multiplied by the amount of earned income(or AIG, if greater) in excess of the beginning of the phase-out range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phase-out range, no credit is allowed.

An individual is not eligible for the EIC if the aggregate amount of disqualified income of the taxpayer for the taxable year excess $3450 (for 2017). This threshold is indexed for inflation. Disqualified income is the sum of interest (taxable and tax-exempt), dividends, net rent and royalty income (if greater than zero), capital gains net income and net passive income (if greater than zero) that is not self-employment income.

The EIC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer’s Federal income tax liability, the excess is payable to the taxpayer as a direct transfer payment.

The EIC generally equals a specified percentage of earned income up to a maximum dollar amount. Earned income is the sum of employee compensation included in gross income (generally the amount reported in Box 1 of Form W2, Wage and Tax Statement) plus net earnings from self-employment determined with regard to the deduction for one half of self-employment taxes. Special rules apply to computing earned income for purposes of the EIC. Net earnings from self-employment generally includes the gross income derived by an individual from any trade or business carried on by the individual, less the deductions attributable to the trade or business that are allowed under the self-employment tax rules, plus the individual’s distributive share of income or loss from any trade or business of a partnership in which the individual is a partner.

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