Can the Earned Income Tax Credit Help You?

Earned Income Tax Credit (EITC) awareness day is in January of each year. The IRS and community organizations across the country shared information about how some eligible families with low-to-moderate incomes could receive a tax break, or refund, of up to $6,935. 

The IRS says that letting people know what the EITC is and how to claim it is critical because millions of workers will qualify for the credit for the first time this year. 

However, findings from a recently released study from Stanford University, with input from the U.S. Treasury Department, show that the IRS audits Black taxpayers at higher rates than non-Black taxpayers—in part because of the EITC. That’s the case even though Black taxpayers aren’t necessarily more likely to claim the credit.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

So, to figure out whether you or someone you know, could benefit from the earned income tax credit, it’s important to have information about what the EITC is, how it works, and how claiming the credit could impact audit risk.

Earned Income Tax Credit awareness

The EITC, also called the earned income credit (EIC), can be overlooked because many people who may be eligible don’t know about the credit, or don’t know how to claim it. 

Some communities at risk of overlooking the credit include Veterans, low-to-moderate-income households without children, individuals with disabilities, and people living in nontraditional homes, according to the IRS.

Awareness is also important because many workers move in and out of eligibility for the earned income credit each year due to life changes like job loss, divorce, becoming a parent, or getting married. 

Last year, nationwide, the IRS says that 31 million eligible workers and families received a total of about $64 billion in earned income credits. The average earned income credit amount received was a little over $2,000.

How does the Earned Income Tax Credit work?

The EIC is a refundable tax credit generally designed for people whose earned income was under $59,187 during 2022. Because the EIC is refundable, it can lower the amount of taxes that you owe. Or the credit can result in a tax refund after you file your tax return. The maximum earned income credit amount is currently $6,935.

“Earned income” is all the taxable income, including wages, that you receive either from a job or from self-employment. There are various rules for claiming the EIC that depend on factors including your adjusted gross income, filing status, and whether you have a “qualifying child.” 

A so-called qualifying child must have a valid social security number and cannot be claimed by more than one person on a tax return. Also, qualifying children are generally under age nineteen. But they can be any age if they are permanently or totally disabled. (There are other requirements for qualifying children under age 24 who are full time students.)

However, to receive the EIC, you must file a federal income tax return. (That’s true even if you aren’t usually required to file a return, or don’t owe any tax.) Also, if you have investment income, it cannot be more than $10,300.

What is the EITC for 2023?

For the 2023 tax year, if you have three or more qualifying children, the EIC is up to $7,430. Then the credit amount goes down with fewer qualifying children. 

For example, if you have only one qualifying child, the EIC is up to $3,733. However, if there are two qualifying children in your family, the credit could be as much as $6,604.

Note: Different income limits apply to each filing status depending on the number of qualifying children. The IRS has a chart on its website that can help you figure out what range applies to your 2023 tax return.

One group that often overlooks the EIC is workers with low-to-moderate income who don’t have children. That is partly because many people think that you must have a child to claim the earned income tax credit. 

In fact, you can still claim the EIC even if you do not have a qualifying child. In that case, the credit for 2023 can be as much as $600.

Whatever your situation, the earned income credit rules and requirements can be confusing, so you can check to see if you are able to claim the EIC by visiting www.IRS.gov/eitc. You can also see IRS Publication 596, which explains the rules and requirements for the EIC.

And, if you made less than $60,000 in 2023, various community sites throughout the country offer free tax preparation assistance.

Can claiming the EITC trigger an IRS audit?

Findings from a study done by Stanford University with help from economists from the U.S. Treasury Department show that the claiming the EITC is an audit red flag for some taxpayers. 

Specifically, the study showed that IRS audit rates were about three to nearly five times higher for Black taxpayers than non-Black taxpayers including Hispanic taxpayers. Even though the IRS and IRS auditors are reportedly not aware of the race of taxpayers when selecting tax returns for audit, the algorithms used to select taxpayers disproportionately identified for audit, Black taxpayers who claimed the EITC on their federal income tax returns.

One of the researchers who contributed to the report has said in interviews, that the IRS’ focus on refundable credits like the earned income tax credit and on confusing aspects on tax returns like claiming dependents as qualifying children—where taxpayers make a lot of inadvertent mistakes—is part of the problem.

So, what does this mean for you? If you are claiming the EITC, keep in mind that the algorithms the IRS traditionally uses to identify tax returns for audit focuses in part on that credit. Consult a professional if you’re worried or confused about how to claim qualifying children for the credit. Depending on your income, you may be able to get free assistance with preparing your tax return.

State earned income credits

You might be eligible for an earned income credit on your state tax return.  Several states and the District of Columbia, plus New York City, offer versions of the earned income credit for 2023.

To learn more about whether your state offers an earned income credit and whether you can claim it, visit the IRS information page on state and local governments with earned income tax credits.

Related

• Which States Are Still Sending Stimulus Checks?
• IRS Promises Fewer Audits of the Earned Income Tax Credit
• Best States for Middle-Class Families