Earned income tax credit

The United States federal earned income tax credit or earned income credit is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC benefit depends on a recipient's income and number of children. Low-income adults with no children are eligible. For a person or couple to claim one or more persons as their qualifying child, requirements such as relationship, age, and shared residency must be met.
The earned income tax credit has been part of political debates in the United States over whether raising the minimum wage or increasing EITC is a better idea. In a random survey of 568 members of the American Economic Association in 2011, roughly 60% of economists agreed or agreed with provisos that the earned income tax credit program should be expanded. In 2021, when the survey was done again, the percentage of economists that agreed to expanding the credit increased to 90%.

Overview

In 1969, Richard Nixon proposed the Family Assistance Plan, which included a guaranteed minimum income in the form of a negative income tax. The House of Representatives passed this plan, but the Senate did not. During his 1972 Presidential campaign, George McGovern proposed a demogrant of $1,000 for every American. Critics during this time complained about implying people don't have to work for a living, and saw the program as having too little stigma; during this time, Hawaii had an established residency requirement for public aid, which one Hawaii State Senator suggested was necessary to discourage "parasites in paradise".
Proposed by Russell Long and signed into law by President Gerald Ford as part of the Tax Reduction Act of 1975, the EITC provides an income tax credit to certain individuals. Upon enactment, the EITC gave a tax credit to individuals who had at least one dependent, maintained a household, and had earned income of less than $8,000 during the year. The tax credit was $400 for individuals with earned income of less than $4,000. The tax credit was an amount less than $400 for individuals whose income was between $4,000 and $7,999 during the year.
The initial EITC was expanded by tax legislation on a number of occasions, including the widely publicized Tax Reform Act of 1986, and it was further expanded in 1990, 1993, 2001, and 2009, regardless of whether the act in general raised taxes, lowered taxes, or eliminated other deductions and credits. In 1993, President Clinton tripled the EITC. Today, the EITC is one of the largest anti-poverty tools in the United States, and is mainly used to "promote and support work". Most income measures, including the poverty rate, do not account for the credit.
A qualifying child can be a person's daughter, son, stepchild, or any further descendant or a person's brother, sister, half sister, half brother, stepbrother, stepsister, or any further descendant. A qualifying child can also be in the process of being adopted provided he or she has been lawfully placed. Foster children also count provided either the child has been officially placed or is a member of one's extended family. A younger single parent cannot claim EITC if he or she is also claimable as a qualifying child of their parent or another older relative, which can happen in some extended family situations. This restriction does not apply to a married couple who is claiming EITC with a child, even if one or both spouses are under the age of 19.
A person claiming EITC must be older than his or her qualifying child unless the “child” is classified as "permanently and totally disabled" for the tax year. A qualifying "child" can be up to and including age 18. A qualifying "child" who is a full-time student can be up to and including age 23. And a person classified as "permanently and totally disabled" can be any age and count as one's qualifying "child" provided the other requirements are met. Parents claim their own child if eligible unless they are waiving this year's credit to an extended family member who has higher adjusted gross income. There is no support test for EITC. There is a six-month plus one day shared residency test.
In the 2009 American Recovery and Reinvestment Act, the EITC was temporarily expanded for two specific groups: married couples and families with three or more children; this expansion was extended through December 2012 by H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Effective for the 2010, 2011, 2012 and 2013 filing seasons, the EITC supported these taxpayers by:

Increasing benefits for larger families by creating a new category or “third tier” of the EITC for families with three or more children. In this tier, the credit phases in at 45 percent of income, effectively increasing the maximum credit for these families by almost $600.
Increasing marriage penalty relief by raising the income threshold at which the EITC begins to phase out for married couples to $5,000 above the amount for unmarried filers, thereby giving MFJ filers a longer plateau. The combined plateau and phase-out range for married filing jointly is still not double that for single filers, and thus there still is a marriage penalty, just less than there used to be.

As of 2025, 31 states and DC have enacted state EITCs: California, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington, and Wisconsin. Some of these state EICs are refundable, and some are not. In addition, a few small local EITCs have been enacted in San Francisco, New York City, and Montgomery County, Maryland.
EITC phases in slowly, has a medium-length plateau, and phases out more slowly than it was phased in. Since the credit phases out at 21% or 16%, it is always advantageous to the taxpayer to have one more dollar of actual salary or wages considering the EITC alone. However, investment income is handled far less gracefully, as one more dollar of income can result in a sudden and complete loss of the credit. If the EITC is combined with multiple other means-tested programs such as Medicaid or Temporary Assistance for Needy Families, it is possible that the marginal tax rate approaches or exceeds 100% in rare circumstances depending on the state of residence; conversely, under certain circumstances, net income can rise faster than the increase in wages because the EITC phases in.

Earned income

Earned income is defined by the United States Internal Revenue Code as income received through personal effort, with the following as the main sources:

Wages, salaries, tips, commissions, and other taxable employee pay.
Net earnings from self-employment.
Gross income received as a statutory employee.
Disability payments through a private employer's disability plan received prior to minimum retirement age.
Nontaxable combat pay received by a member of the U.S. armed services which he or she elects to include for purposes of EIC calculation. This is an all-or-none election. For each tax year, the service member must elect to include either all of the combat pay or none of it.

Income that does not qualify as earned includes investment income, rental income, alimony, pensions, social security, worker's comp, etc.

Qualifying children

If an adult's income is very low they may be eligible for EITC even if they have no children, for the 2021 tax year, that was less than $21,430.
A person or couple claiming EITC with one or more qualifying children need to fill out and attach Schedule EITC to their 1040 or 1040A. This form asks for the child's name, social security number, year of birth, whether an older "child" age 19 to 23 was classified as a student for the year, whether an older "child" is classified as disabled during the year, the child's relationship to claimant, and the number of months the child lived with the claimant in the United States.
To claim a person as qualifying child, the following requirements of relationship, age, and shared residence must be met.

Relationship

In the case of a married couple filing jointly, if one spouse is related to the child by any of the below relationships, both spouses are considered related to the child.
The claimant must be related to their qualifying child through blood, marriage, or law. The qualifying child can be:

a person's daughter, son, stepchild, or any further descendant,
or a person's brother, sister, half sister, half brother, stepbrother, stepsister, or any further descendant,
or a foster child officially placed by an agency, court, or Indian tribal government. Authorized placement agencies include tax-exempt organizations licensed by states as well as organizations authorized by Indian tribal governments to place Native American children.
or an adopted child, including a child in the process of being adopted provided he or she has been lawfully placed.

A child might classify as the qualifying child of more than one adult family member, at least initially. For example, in an extended family situation, both a parent and an uncle may meet the initial standards of relationship, age, and residency to claim a particular child. In such a case, there is a further rule: If a single parent or both parents, whether married or not, can claim the child but choose to waive the child to a non-parent, such as a grandparent or uncle or aunt, this non-parent can claim the child only if they have a higher adjusted gross income than any parent who has lived with the child for at least six months.
This still remains the parent's choice. Provided the parent has lived with the child for at least six months and one day, the parent can always choose to claim his or her child for purposes of the earned income credit. In a tiebreaker situation between two unmarried parents, the tiebreak goes to the parent who lived with the child for the longest. In a tiebreaker between two non-parents, the tiebreak goes to the person with the higher AGI. And in a tiebreaker between a parent and non-parent, the parent wins by definition. These tiebreaker situations only occur if more than one family member actually file tax returns in which they claim the same child. On the other hand, if the family can agree, per the above and following rules, they can engage in a limited amount of tax planning as to which family member claims the child.