Earned-Income Credit (EIC)Defined with Examples & How to Calculate

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Written By:
Lisa Borga

The earned-income credit (EIC) is a tax credit that is intended to help low and middle-earning U.S.taxpayers by reducing the amount of federal tax that is owed.

The EIC tax credit is refundable in cases where the credit exceeds the taxpayer’s liability.

This tax credit changes in amount every year, and the amount a taxpayer qualifies for is based on their marital status, the number of qualifying children, and their earnings.

For the 2021 tax year, the American Rescue Plan Act of 2021 provides a significant increase in eligibility and benefits for individuals that qualify as childless.

IRS EITC

Understanding the Earned Income Credit

Taxpayers with low to moderate earnings may qualify for the EIC whether or not they have a dependent.

They do need to have lived in the United States for over six months during the tax year.

Also, the taxpayer or for married taxpayers, the taxpayer or their spouse must be at least 19 years of age.

A qualifying dependent for the EIC will typically be a dependent child below the age of 19, a full-time college student who is not yet 24 years old, or a dependent with a disability.

The actual percentage of the credit, the earnings cap, as well as the amount of the credit will depend on the taxpayers’ number of dependents and income.

The same factors will determine the phaseout range, which will decrease to zero.

A taxpayer is required to have earnings in order to be eligible for the EIC.

However, a taxpayer’s investment income is limited to $10,000.

There are other requirements as well, such as age, residency, and relationship.

If the taxpayer does receive a tax credit, it will reduce the amount of taxes.

Additionally, if the credit is greater than the taxes owed, the taxpayer will likely be eligible for a refund.

The Earned Income Credit is a crucial tax credit for many individuals with low incomes.

Individuals that are United States citizens or resident aliens and have a Social Security number, and have lived in the country for the entire year by the due date for taxes can qualify for the EIC.

The credit the taxpayer may earn will depend on their filing status, the number of dependents, and annual earned income.

An Example of the Earned Income Credit

Unlike a tax deduction which reduces the amount of income that will be taxed, a tax credit reduces the actual amount of taxes an individual owes.

For instance, if a taxpayer that owes $2,000 in taxes and has a tax credit of $1,500 will only owe $500 after claiming the tax credit if the tax credit is more than the taxes the individual owes, such as someone who owes $700 in taxes,  but has a tax credit of $1,000, the person will likely receive a refund of $300.

earned-income credit

Who Qualifies for the Earned Income Credit?

Taxpayers qualify for the Earned Income Credit if their adjusted gross income and earned income fall below the required income limit.

These limits vary depending on whether a person is married or single, as well as how many children they have and what their tax filing status is.

A taxpayer that is married but filed separately must meet certain criteria, which are explained later in this article.

The table below shows the maximum adjusted gross income an individual can make and still qualify for the EIN.

2021 Tax Year

Children or Relatives ClaimedMaximum AGI (filing as Single, Head of Household, Widowed or Married Filing Separately)Maximum AGI (Married Filing Jointly)
0$21,430$27,380
1$42,158$48,108
2$47,915$53,865
3$51,564$57,414

The investment income limit is $10,000.

The maximum credit amounts are as follows:

  • For no qualifying children: $1,502
  • For one qualifying child: $3,618
  • For two qualifying children: $5,980
  • For three or more qualifying children: $6,728

Changes to the Earned Income Credit for 2021 Tax Returns

Several EIC rules have been revised for tax returns being filed for the 2021 tax year as a result of the American Rescue Plan Act of 2021 (ARPA), and some of these are temporary changes that will only apply for 2021.

Temporary Changes

One of the temporary changes is increased eligibility and more generous benefits for taxpayers who do not have any eligible children.

Under the regular rules for the EIC, a person with no children qualified for the EIC if they were from 25 years old through 64 years old.

However, for 2021, the minimum age has dropped to 19, and there is no maximum age.

The benefit amount is considerably more generous as well.

Previously, the maximum benefit amount for 2021 would have been $543.

But, with the ARPA, the maximum amount for 2021 is $1,502.

This is due to the credit percentage being increased from 7.65% to 15.3%, and the maximum earned income phaseout amount raising from $9,820 to $11,610.

Permanent Changes

There are some permanent changes to EIC rules as well as a result of the ARPA, such as the amount of allowable investment income and spouses filing separate returns.

The maximum amount of investment income allowed in 2021 is $10,000, up from $3,650.

Also, under the new rules, a spouse filing income taxes as head of household or married filing separately can qualify for the EIC if they:

  • have a qualifying child for over six months of the year
  • Did not live in the same principal home with their spouse for the previous six months
  • Has a separation agreement (not a divorce) and does not live with their spouse at the end of the year

These changes, unlike the temporary additions to the EIC, will pass on to future tax years.

Key Takeaways

  • The earned income credit is available to those taxpayers with low to moderate earnings with or without dependents. It can help to supplement these workers’ wages and help reduce the burden of Social Security taxes.
  • The EIN is refundable, so if the credit is greater than the amount of taxes owed, the taxpayer may be eligible to receive the remainder of the credit as a refund.
  • A taxpayer must have earnings in order to be eligible for the EIC. But, investment income cannot go beyond the specified limit.
  • The American Rescue Plan Act of 2021 changes some of the rules for the EIC.

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  1. Southern University "Earned Income Credit EIC2021" PDF. November 29, 2021

  2. IRS.gov "Earned Income and Earned Income Tax Credit (EITC) Tables" Page 1 . November 29, 2021

  3. Cornell Law School "26 U.S. Code § 32 - Earned income " Page 1 . November 29, 2021