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What Is the EITC -- and Does It Affect You?


Although the tax reform passed late in 2017 seemed to change everything, it actually had little effect on the earned income tax credit alone. But the credit is still complicated, and taxpayers should understand how it works.

First of all, it's wide-ranging: In the 2017 tax year, almost 27 million working families and individuals received the EITC, with an average amount nationwide of $2,445. The size of the EITC depends on a recipient's income, marital status and number of children. Larger credits go to families with more children. Income limits on eligibility extend well into what many consider to be the middle class — for 2018, a married couple with three children making $54,884 is the top income that can claim the EITC, which is $6,431.

That's because the EITC is a credit equal to a percentage of earnings up to a maximum credit, with the largest credits being reserved for those with incomes significantly below the upper limits. It provides support to low- and moderate-income working parents and, to a much lesser degree, to childless individuals. Working-poor individuals who have no children and incomes below about $15,270 can receive a very small EITC — just above $500. It's a similar story for a married couple with no children earning $20,950.

One of the biggest benefits of the EITC is that it can give taxpayers money back even if they wouldn't otherwise owe any tax. The credit is an example of a refundable tax credit: You get a check from the IRS if your taxes due are less than the amount of the credit.

Unfortunately, according to the IRS, as many as one in five eligible taxpayers don't claim the EITC, even though it can be helpful: It is not just a handout, but a program that induces more people into the workforce and encourages them to work more by raising their wages. The credit is structured not to penalize earning more.

Instead of just taking money and giving it to people at the bottom end of the income distribution, the EITC encourages work. But there's a limitation on the amount of investment income that a taxpayer can earn and still qualify for the credit. Those who have more than $3,500 in investment income aren't eligible to take the credit.

While some are calling for broadening the program to include more childless individuals, the large majority of benefits from the credit go to families with children.

Since it may not be obvious that you or your family members are eligible to receive the EITC, be sure to check with a financial professional, as the calculations can be complicated and you may need substantial documentation.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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