Breaking Down The Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax credit provided to help offset the basic living expenses (including FICA taxes) of low income employees.

For an employee to qualify for the EITC, earned income and adjusted gross income must be less than a certain amount, depending on his or her filing status and amount of qualifying children. Here are the thresholds for single filing and married filing employees:

Single 

• With zero children: $14,880
• With one child: $39,296
• With two children: $44,648
• With three or more children: $57, 955

Married 

• With zero children: $20,430
• With one child: $44,846
• With two children: $50,198
• With three or more children: $53,505

A number of relationships fall under 'qualifying children':

• The employee's birth children
• Adopted children or foster children
• Stepchildren
• Descendants of his or her children or adopted children
• Brother, sister, half-brother, half-sister, step brother, step sister
• Nieces or nephews

There are also certain stipulations that must be met for these children. They include:

• He or she is under age 19 or is a full time student under age 24 or is permanently and totally disabled
• Lived with the employee in the US for more than 6 months out of the year (12 months for foster children) or was born, or died, during the year and the employee's home in the U.S. was the child's home for its entire life.

The EITC may be claimed as a direct offset to an employee's income tax liability by filing Schedule EIC and listing the children on either Form 1040A or 1040.

Employers must notify employees whose wages are not subject to federal income tax withholding (unless they are exempt because they did not incur any liability for the previous year and expect to incur no liability for the current year) that they may be eligible for a refund as a result of the EITC. Employers might also want to notify employees making less than the qualifying amounts that they might be eligible.