What is gross income? How it works and why it’s important
A person’s gross income is used to determine how much they have to pay toward federal and state income taxes.
3 MIN READ
Jun. 2, 2021
What is the earned income tax credit?
The earned income tax credit is a tax credit targeted at low- to moderate-income taxpayers. The purpose of the tax credit is to encourage people who work in low-wage jobs to keep working and avoid relying on social services or welfare.
Deeper definition
Taxpayers who meet the eligibility requirements for the earned income tax credit file standard tax returns like everyone else. The Internal Revenue Service (IRS) then reduces the amount of tax each qualifying person owes and transfers the amount to their tax refunds.
Eligible taxpayers must have earned an adjusted gross income that falls within limits set by the IRS for the tax year. They also must meet basic rules, which include the following:
- The taxpayer, spouse, and qualifying children must have valid Social Security numbers.
- The taxpayer must use one of the following filing statuses: married filing jointly, head of household, qualifying widow or widower, or single.
- The taxpayer’s investment income must be less than $3,400 for the tax year.
Taxpayers must also meet additional requirements, depending on whether or not they have qualifying children at home. Spouses who do not have children must be between the ages of 25 and 65 during the tax year and not be claimed as a dependent on another person’s tax return. They also must live in the U.S. for at least six months of the year.
Children must be younger than 19, but those enrolled in school may be as old as 24. They must live with the taxpayer for at least six months during the year, and they may not file a joint return for the tax year.
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Earned income tax credit example
A taxpayer with one qualifying child in the 2016 tax year received up to $3,373 as a tax credit. Ezekiel earned $30,000 during the 2016 tax year, and after accounting for all deductions, he had a tax bill of $2,810, but paid $4,500 in income tax payroll deductions. Ezekiel qualified for the maximum earned income tax credit, and received a tax refund of $5,063.
