Earned Income Tax Credit (EIC)
What it is:
How it works/Example:
Earned income is an IRS term for income obtained by participating in a business or trade -- typically, this means salaries, bonuses, wages, commissions, and tips. Union strike benefits are also considered earned income, as are long-term disability benefits received prior to minimum retirement age.
In general, to be eligible for the EIC, a person must have income and adjusted gross income (AGI) within certain limits. The amount of the credit depends on the amount of earned income and the number of children in the household. In 2011, the maximum EIC was:
- $5,751 with three or more qualifying children;
- $5,112 with two qualifying children;
- $3,094 with one qualifying child;
- $464 with no qualifying children.
In 2011, a filer's earned income and adjusted gross income must be less that the following in order to qualify for the EIC:
- $43,998 ($49,078 married filing jointly) with 3 or more qualifying children
- $40,964 ($46,044 married filing jointly) with 2 qualifying children;
- $36,052 ($41,132 married filing jointly) with 1 qualifying child; or
- $13,660 ($18,740 married filing jointly) with no qualifying children.
Why it matters:
By claiming the EIC, a taxpayer can end up with a tax refund larger than the total tax paid through withholding. It is important to note, however, that earned income is different from unearned income, which generally includes interest, dividends, and similar proceeds. Pensions, social security, unemployment benefits, alimony, and child support are also not considered earned income.