12 Things to Know About the Earned Income Tax Credit

Many low- and moderate-income households will get a significant tax refund this year because of the Earned Income Credit. The credit, which helps working individuals and families, can sometimes be confusing, but knowing the rules -- which can change from one year to the next -- could be worth thousands of dollars.

According to the IRS, 27 million individuals and families received an average of $2,445 in EIC payments in 2017 for a total of $65 billion distributed nationwide, and according to the Center on Budget and Policy Priorities, a think tank, the credit has been shown to encourage those on welfare to remain in the workforce, and the resulting refund has helped lift millions of households out of poverty.

Citizens must file a federal tax return to claim the EIC and get a refund. Even for someone who doesn't earn enough to be required to file a return, it could be worth filing just to claim the credit. Millions of taxpayers will qualify for the EIC for the first time this year.

The value of the EIC ranges from $2 to $6,318 for the 2017 tax year, depending on how many qualifying children are in the household. A credit up to $510 can be claimed by some taxpayers who don't have any children. The EIC is a refundable credit, meaning the credit can offset taxes owed and result in a refund. By contrast, nonrefundable credits can only offset taxes owed.

By law, the IRS must hold refunds for households that claim the EIC or Additional Child Tax Credit until mid-February. Due to holidays and bank processing times, the IRS said refunds would begin arriving Feb. 27.

As the name implies, taxpayers must have earned income to qualify for the credit. Earned income includes taxable wages, some taxable long-term disability benefits, self-employment profits, and nontaxable combat pay. Some types of income don't qualify as earned income, including interest or dividends, alimony, child support, unemployment, and Social Security.

The EIC is meant to help low- to moderate-income households, so there are income limitations. For example, a married couple without children filing jointly can have maximum earned income and adjusted gross income of $20,600 in 2017. People filing as single, head of household, or widowed with three or more children could qualify for the credit if their earned income and adjusted gross income are below $48,340. Regardless, no more than $3,450 worth of investment income is allowed.

Taxpayers classified as "married filing separately" cannot claim the EIC, and there are rules taxpayers must follow to determine filing status. Even a couple who are no longer together might not qualify for "single" or "head of household" status unless they get an official maintenance decree or divorce by the last day of the year. Taxpayers unsure of their filing status can use the IRS' What Is My Filing Status tool. 

A person must meet certain guidelines to be designated a qualifying child for purposes of claiming the EIC — and being a child isn't necessarily one of them. For example, disabled adult sibling could count, but the person must be related to the taxpayer, live with the taxpayer for more than half of the year, not be claimed by more than one person, and meet age requirements.

Although a qualifying child must live with the taxpayer for more than half the year, in some cases a person could count as a qualifying child for the EIC but not as a dependent. A permanently disabled sibling who pays for more than half of her living expenses with disability income can't be claimed as a dependent but still counts as a qualifying child for EIC purposes.

Taxpayers must have a valid Social Security number by the tax-filing deadline, including extensions, to claim the credit. Children must also have a valid Social Security number to meet the qualifying child requirements. If you apply for an SSN but don't receive it by the filing deadline, you can automatically apply for a six-month extension.

Many benefits programs, including Medicaid, Supplemental Nutrition Assistance Program, and Temporary Assistance for Needy Families, have low-income requirements. A refund received after claiming the EIC doesn't count as income when determining eligibility for these and several other programs.

A taxpayer who claims the EIC mistakenly or fraudulently might not be able to claim the credit for the next 10 years if the IRS finds fraud, or two years if there was an error or intentional disregard for the rules. In either case, the IRS can also charge penalties and fees. Taxpayers can use the IRS' Assistant tool to see if they qualify.