Earned Income Tax Credit (EITC)

The earned income tax credit is a refundable credit under Internal Revenue Code section 32 for individuals and families with earned income below annual limits that scale with the number of qualifying children. Because it is refundable, it is not capped by the filer's tax liability. If the credit exceeds the tax owed, the excess is paid out as a refund, which is why it functions as an income supplement for low-wage work rather than only as a tax reduction. The IRS calls it the earned income credit, abbreviated EIC, on Form 1040 and on Schedule EIC, so a person holding the form and a person reading about the EITC are looking at the same credit under two names.

The credit has three phases, and understanding which one a household is in explains almost every question about it. In the phase-in, the credit is a fixed percentage of earned income, so each additional dollar earned increases it. The statutory percentages in section 32(b)(1) do not change with inflation and have not moved in decades. They are 7.65 percent with no qualifying children, 34 percent with one, 40 percent with two, and 45 percent with three or more. At the plateau the credit sits at its maximum and additional earnings change nothing. In the phase-out it falls at 7.65 percent with no qualifying children, 15.98 percent with one, and 21.06 percent with two or more, until it reaches zero.

The dollar amounts are indexed and the percentages are not, which is the cleanest way to keep the two apart. Section 32(j) adjusts the earned income amounts, the phase-out starting points and the disqualified income limit annually. Nothing indexes the percentages. So for 2026, a family with two qualifying children reaches the maximum credit of $7,316 once earned income reaches $18,290, holds it until income passes $23,890 ($31,160 on a joint return), and loses it entirely above $58,629 ($65,899 joint). A filer with no qualifying children faces a much tighter version of the same shape, topping out at $664 and disappearing above $19,540.

The credit is a table lookup rather than a formula. Section 32(f) directs the Secretary to prescribe tables with income brackets no larger than $50, and the credit is determined from those tables. A percentage calculation will get close to the right answer and can differ from the amount actually allowed, so the tables in the Form 1040 instructions, not arithmetic, produce the figure that goes on the return.

Four disqualifiers catch people who otherwise fit the income picture, and they operate independently of the phase-out. The first is disqualified income under section 32(i), and it is a cliff rather than a taper. The statute says plainly that "no credit shall be allowed under subsection (a) for the taxable year if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds" the limit, which is $12,200 for 2026. One dollar over and the whole credit is gone. The category is also wider than "investment income" suggests. Section 32(i)(2) reaches taxable interest, tax-exempt interest, dividends, net rent and royalty income received outside a trade or business, capital gain net income, and net passive income. A worker with a small rental property and some municipal bonds can be disqualified while a coworker with identical wages is not.

The second is the joint-return rule. Section 32(d)(1) provides that for a married individual "this section shall apply only if a joint return is filed for the taxable year under section 6013." There is a carve-out at section 32(d)(2)(B), and it is commonly misread as an exception letting a married person claim the credit on a separate return. It does something different. It provides that a qualifying individual "shall not be treated as married" for section 32 purposes at all, and it applies only to someone who lives with a qualifying child for more than half the year and either did not share a principal place of abode with their spouse during the last six months of the year or holds a qualifying separation instrument. A separated filer with no qualifying child gets nothing from it, and a filer who does qualify is not claiming the credit as a separate filer. They are treated as unmarried and file accordingly. The considered-unmarried test for head of household is a different test with different conditions, and passing one does not imply passing the other.

The third is identification. Section 32(m) requires a valid Social Security number issued "on or before the due date for filing the return for the taxable year," and excludes a number issued solely so the holder could receive a federally funded benefit rather than authorizing work. So an individual taxpayer identification number never supports the credit, and a Social Security number that arrives after the filing deadline defeats the credit for that year even if the person was otherwise eligible for all twelve months.

The fourth is a prior disallowed claim. Section 32(k)(1)(B) bars the credit for ten taxable years after a final determination that a claim was due to fraud, and for two taxable years after a final determination that a claim was due to reckless or intentional disregard of the rules but not to fraud. These are among the longest lockouts in the individual tax code, and they attach to a credit claimed largely by people filing without professional help.

Two further limits are worth knowing exist. A filer claiming the foreign earned income exclusion under section 911 is disqualified outright by section 32(c)(1)(C). And section 32(e) denies the credit for any taxable year shorter than twelve months, other than a year closed by the taxpayer's death.

One warning about older sources. Section 32(n) expanded the childless credit substantially, dropping the minimum age to 19, removing the maximum age, and raising both percentages to 15.3 percent. It applied only to a taxable year "beginning after December 31, 2020, and before January 1, 2022." That single year is over, but the subsection is still printed in the Code in full, which is exactly what makes it dangerous. The live rule for a filer with no qualifying children is the age band in section 32(c)(1)(A)(ii)(II), which requires that the individual "has attained age 25 but not attained age 65 before the close of the taxable year." Note the statute's parenthetical: for a married couple, either spouse being inside the band is enough.

In sequence, claiming the credit works like this. Confirm there is earned income, meaning wages, salary, tips or net earnings from self-employment. A household with only investment income, unemployment compensation, Social Security or alimony has no earned income and no credit. Establish whether anyone is a qualifying child, using the section 152 tests that also govern who is a dependent, because the child count sets the percentage, the maximum and the income limits. Check the four disqualifiers above. Then read the credit off the tables in the Form 1040 instructions. Both earned income and adjusted gross income are needed, because section 32(a)(2)(B) runs the phase-out against "the adjusted gross income (or, if greater, the earned income)" of the taxpayer. The larger of the two figures is the one used, which produces the smaller credit.

A hypothetical example of the shape rather than the arithmetic. Dana has one qualifying child and earns $9,000 from part-time work. She is in the phase-in, so the credit is 34 cents for each dollar earned, and picking up extra shifts increases both her pay and her credit. Her neighbor Ellis has one qualifying child and earns $40,000. He is in the phase-out, so the credit falls by 15.98 cents for each additional dollar of income, and a raise still leaves him better off but by less than the raise itself. Both of them file the same schedule and read the same tables. Only their position on the curve differs.

Community property law is switched off for this credit. Section 32(c)(2)(B)(i) provides that "the earned income of an individual shall be computed without regard to any community property laws." So a spouse in Arizona or Texas who would otherwise be treated as earning half of the couple's community wages counts only their own earnings here. This is one of several places where a federal provision expressly overrides state marital property law rather than accepting it.

The refund is held by statute, and the hold is broader than the credit. Section 6402(m) provides that no "credit or refund of an overpayment" may be made before the fifteenth day of the second month following the close of the taxable year when the filer is allowed this credit or the refundable portion of the child tax credit. For a calendar-year filer that lands in mid-February. Two consequences follow. Withholding refunded for reasons entirely unrelated to the credit is held along with it, so an early filer sees nothing until the hold lifts. And the statute is written by reference to the tax year rather than to a calendar date, so "February 15" is shorthand that happens to be right for almost every individual filer.

Pros

• Refundable, so it delivers money to a household whose income tax is already zero, which no nonrefundable credit can do.
• Structured to reward additional work through the phase-in range, where every extra dollar earned increases the credit.
• Scales with family size, and the largest amounts go to households with three or more qualifying children.
• Claimed on the ordinary return with no separate application, and the free filing options most eligible filers qualify for support it.

Cons

• The disqualified income limit is a cliff, not a taper, and it counts tax-exempt interest and net passive income that no one thinks of as investment income.
• The rules are complicated enough that both mistaken claims and unclaimed credits are common, and a mistaken claim can trigger a two-year or ten-year lockout.
• A married couple must generally file jointly, which can force a filing status they would otherwise avoid.
• The refund hold delays money for the households least able to wait for it.
• A filer with no qualifying children gets a much smaller credit inside a much narrower age band, so a young low-wage worker under 25 gets nothing.