[2013 Update] As part of the fiscal cliff deal, the expanded Earned Income Tax credit (EITC) and Child Tax Credit were extended for another five years to 2017. The EITC supplements the wages of low income workers, and especially working mothers, lifting more children out of poverty than any other single federal program. Over 6 million families are eligible for the EITC. This expanded EITC keeps the phaseout thresholds for married couples at or above existing levels for single filers. For 2013 the income and credit limits reflect a slight increase over 2012 levels as shown in the table below.
Two recent changes to the Earned Income Tax Credit (EITC) may put more money in your pocket in 2012 if you are married, or if you have three or more qualifying children. Find out more via the folks at TurboTax
The “earned income amount” (line 1) is the amount of income (minimum limit) at or above which the maximum amount of the earned income credit (line 2) is allowed. The “threshold phaseout amount“ (lines 3 and 5 depending on filing status) and “completed phaseout amount” (lines 4 and 6 depending on filing status) are the adjusted gross income (AGI) ranges from where the EITC begins to phase out to where it reaches $0, or the income at or above which no credit is allowed. These ranges change depending on the filing status. Investment income must also be $3,200 or less for 2013 to claim the credit.
2012 EITC income and credit limits are provided in the update below along with examples of how the EITC works.
Child Tax Credit
The child tax credit maximum for each eligible under-age-17 child will remain at $1,000 for 2013 and will help over 10 million lower income families with 18 million children. The fiscal cliff deal also contains provisions to make the 2013 Child Tax Credit available to more working families that previously could not benefit from it by raising income qualification thresholds (which are not indexed to inflation).
For 2012, the child tax credit starts phasing out (reducing) for those above a specified modified adjusted gross income (MAGI). For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. The credit is reduced/phased-out by $50 for each $1,000 of income above the above threshold amounts.
In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax (AMT) you owe. Other qualification details for the credit can be found in this article.
[2012 update] The IRS has officially released 2012 tax details and here are the changes to the Earned Income and Child Tax Credits:
- The 2012 Earned Income Tax credit (EITC) changes are shown in the table below: The “earned income amount” (line 1) is the amount of income (minimum limit) at or above which the maximum amount of the earned income credit (line 2) is allowed. The “threshold phaseout amount“ (lines 3 and 5 depending on filing status) and “completed phaseout amount” (lines 4 and 6 depending on filing status) are the adjusted gross income (AGI) ranges from where the EITC begins to phase out to where it reaches $0, or the income at or above which no credit is allowed. These ranges change depending on the filing status.
Example on figuring the EITC: Your AGI is $43,000, you are single, and you have two qualifying children. You cannot claim the EITC because your AGI is not less than the 2012 completed (maximum) phase out limit of $41,952. However, if your filing status was married filing jointly, you would be able to claim some of the EITC because your AGI is less than $47,162 complete phase out limit. You cannot get the fill EITC because your income is above the $22,300 threshold phase amount. Further examples and details are provided in the previous updates below.
Note: The earned income tax credit is not allowed at all if the aggregate amount of certain investment income exceeds $3,200 for the given tax year.
[Updated] As part of bush-era tax cuts extension legislation (Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010), a number of existing tax breaks were extended. One is the Earned Income Tax Credit (EITC), which as discussed below, supplements the wages of low income workers, and especially working mothers, lifting more children out of poverty than any other single program or category of programs. The EITC will help 6.5 million working parents with 15 million children.
Under the 2008 Recovery Act, the EITC was expanded to reduce the marriage penalty and to create a “third tier” of the EITC for families with three or more children. This means larger families now receive up to $1,040 more than they would have under the old system. By extending the EITC the following benefits continue:
• About 6 million families will receive an expanded EITC tax credit. Without this agreement, these families could lose up to $1,040.
• About 1 million families headed by single mothers will receive an expanded EITC tax credit
The other tax break that was extended for two years was the Child Tax Credit (CTC), which is worth about $1,000 per eligible child, within the $3,000 refundability threshold. This extension will ensure an ongoing tax cut to 10.5 million lower income families with 18 million children.
The Child Tax Credit helps low-and moderate-income families with children. The credit allows families to reduce their federal income tax by a certain amount for each qualifying child under the age of 17 in a household. In the 2008 Recovery Act, the Administration and Congress secured an important expansion in the Child Tax Credit for lower income families by lowering the minimum amount from about $12,500 to $3,000.
For many of these families, extending the minimum threshold in the CTC will result in thousands of dollars in additional tax benefits that would have otherwise been lost. For example:
- A married couple with three children making $23,000 will receive $3,000 in child tax credits compared to about $1,540 if only the 2001/2003 tax cuts were extended – an increase of about $1,460.
- A single mother with two children making $17,000 will receive $2,000 in child tax credits compared to about $640 if only the 2001/2003 tax cuts were extended – an increase of about $1,360.
Source : Whitehouse.gov
One of the most claimed, but least understood and publicized is the Earned Income Credit (EIC) for low income earners. Thanks to Obama’s Economic Stimulus Package this credit has received a considerable bump for tax years 2009 and 2010 and many families may now qualify for this credit. The EIC is basically a tax credit for certain people who earn and income (hence the name of the credit) and have less than $48,279 of earned income. Because it is a tax credit it is money straight in your pocket (refund) or reduces the amount of tax you owe. The table below provides a summary of the qualification criteria for the credit:
As shown in the table, the amount of EITC and income thresholds increase in 2009 and 2010 for workers with a third qualifying child. Also, the definition of qualifying child has also changed in 2009, which is now:
·To be your qualifying child, a child must be younger than you unless the child is permanently and totally disabled.
·A child cannot be your qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.
·If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person’s adjusted gross income (AGI) is higher than the highest AGI of any of the child’s parents who can claim the child.
Example of claiming the EIC: Your AGI is $35,550, you are single, and you have one qualifying child. You cannot claim the EIC because your AGI is not less than $35,463. However, if your filing status was married filing jointly, you might be able to claim the EIC because your AGI is less than $40,463.
Additional Criteria and Claiming the Earned Income Credit in your Tax Return
If you are eligible for the EIC based on the above criteria, you normally claim in your tax return. To claim the EIC credit you (and your spouse if filing a joint return) must also have a valid SSN issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC also must have a valid SSN. You can request an extension if you do not have your SSN. Other criteria you must meet to claim the EITC :
-Your investment income is $3,100 or less. If your investment income is more than $3,100, you cannot claim the credit.
-You Must Be a U.S. Citizen or Resident Alien All Year
-You must however have earned income through working during the year (hence the name of the credit). If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. If you are an employee, earned income includes all the taxable income you get from your employer. If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the instructions for Form 1040
-If you retired on disability, taxable benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age
-If you and someone else have the same qualifying child but the other person cannot claim the EIC because he or she is not eligible or his or her earned income or AGI is too high, you may be able to treat the child as a qualifying child. But you cannot treat the child as a qualifying child to claim the EIC if the other person uses the child to claim any of the other six tax benefits listed earlier.
If you expect to qualify for the earned income credit in 2010, you may be able to receive part of it in each paycheck throughout the year from your employer (the maximum Advance EITC workers can receive from their employers is $1,830). For more information on the above, you can refer to the IRS Publication 596