Overview of the 2012 Earned Income Tax Credit (EITC)

June 27, 2012 | By: TaxCure Staff

earned income tax credit summaryOne of the most popular tax credits out there is the Earned Income Tax Credit (EITC or EIC). This is a credit aimed at helping low to medium income taxpayers. The biggest advantage of the EITC is that it is refundable. This means that if the amount of the credit exceeds the tax liability of the taxpayer, he or she receives a refund for the difference.

Who Qualifies for the Earned Income Tax Credit in 2012?

The EITC comes with some qualifications. First of all, the credit is available to those who have earned income, whether they have qualifying children. For tax year 2012, the maximum credit is $475. When the taxpayer does have qualifying children, however, the amount of the credit increases. The 2012 levels with qualifying children are:

  • $3,169 for one qualifying child
  • $5,236 for those with two qualifying children
  • $5,891 for those with three or more qualifying children

As you can see, the EITC can be a helpful tool in reducing tax liability – and even getting a bigger refund. Eligibility and phase outs are based on your taxable income, not your gross income.

What is the EITC Income Limits for 2012?

Earned Income and your Adjusted Gross Income (AGI), though, affects your ability to claim the EITC. For married couples filing a joint return with no children, the credit begins phasing out at $13,980 a year, and is completely phased out at $19,190. For married couples with qualifying children, the phase out is pushed back, depending on how many children there are. The credit begins to phase out at $36,920 a year. The credit completely phases out at $42,130 for one child, $47,162 for two children, and $50,270 for three children.

What is a Qualifying Child with the EITC or Earned Income Tax Credit?

If you want to maximize your EITC, you need to understand what qualifies a child. You need to provide each child’s name, Social Security number and birth year. If a child is between 19 and 23, you need to indicate whether or not the older child is classified as disabled, or whether he or she is full-time student.

Once that information is determined, there are three tests that need to met in order to determine whether or not a child qualifies:

  • Age: Unless your child is a full-time student for five months of the year, or disabled, only a child who is under the age of 19 on December 31 qualifies for the EITC.
  • Relationship: Your relationship to the child you are claiming matters. In order to qualify, the child must be related by blood, marriage, or law. This includes your son, daughter, stepchild, or legally adopted child. A foster child officially placed can also be considered qualifying. Other blood relatives, such as nieces and nephews, brothers and sisters, and grandchildren can also be considered.
  • Shared residence: Finally, in order to qualify, the dependent must live with you, in the United States, for more than half of the tax year. So, there must be a shared residence for six months and one day (which counts as seven months on schedule EIC). Realize that active duty military personnel who are stationed outside the U.S. are still considered to be living in the States for the purposes of the EITC.

In order to qualify, all three criteria must be met. Once these criteria are shown to have been met, it is possible to receive the EITC, as long as you are within the income limitations.

As you prepare your taxes, don’t forget about the EITC. If you qualify, it’s a great way to legally reduce your tax liability, and even boost your refund.