The earned income tax credit is a refundable federal credit equal to a credit percentage of so much of the taxpayer’s earned income for the taxable year as does not exceed the earned income amount (26 U.S.C. 32(a)(1)). It rises with earnings to a ceiling, holds, and then falls away as income passes a second threshold.
The tables everyone looks up are the output of that structure, not the rule. The percentages behind them are fixed in the Code and the dollar amounts are indexed, so the shape stays constant while the figures move every year.
The Two-Part Computation
The credit is defined once and then capped. The amount allowable shall not exceed the excess, if any, of the credit percentage of the earned income amount, over the phaseout percentage of so much of the adjusted gross income, or if greater the earned income, of the taxpayer for the taxable year as exceeds the phaseout amount (26 U.S.C. 32(a)(2)).
Two details in that sentence decide real cases. The phaseout runs on adjusted gross income, or if greater the earned income, so a taxpayer cannot lower the phaseout base by having non-earned income taken out of the picture. And the phaseout reduces the maximum credit rather than the credit already computed, which is why the credit is flat across a middle band of income.
The Percentages Are Fixed in the Statute
These do not change with a revenue procedure, and they are the durable part of the credit. For purposes of subsection (a), the credit percentage and the phaseout percentage are determined as follows (26 U.S.C. 32(b)(1)):
For an eligible individual with 1 qualifying child the credit percentage is 34 and the phaseout percentage is 15.98 (26 U.S.C. 32(b)(1)). With 2 qualifying children the credit percentage is 40 and the phaseout percentage is 21.06 (26 U.S.C. 32(b)(1)). With 3 or more qualifying children the credit percentage is 45 and the phaseout percentage is 21.06 (26 U.S.C. 32(b)(1)). With no qualifying children both percentages are 7.65 (26 U.S.C. 32(b)(1)).
Note that the phaseout percentage is the same for two children and for three or more, while the credit percentage is not. The third child raises the ceiling and does not slow the taper.
The Dollar Amounts Are Indexed, So Do Not Quote the Statute’s
The statute prints an earned income amount and a phaseout amount for each family size, and a joint-return increase of $5,000 to the phaseout amount (26 U.S.C. 32(b)(2)(A) and 32(b)(2)(B)). Those printed figures are base amounts, not current ones.
In the case of any taxable year beginning after 2015, and 2021 in the case of the dollar amount in subsection (i)(1), each of the dollar amounts in subsections (b)(2) and (i)(1) shall be increased by that dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, with substituted base years for each group (26 U.S.C. 32(j)(1)).
The base years differ by amount, which is why the figures do not move in step. Calendar year 1995 is substituted for the amounts in subsection (b)(2)(A), calendar year 2008 for the $5,000 joint-return amount in (b)(2)(B), and calendar year 2020 for the $10,000 amount in subsection (i)(1) (26 U.S.C. 32(j)(1)(B)(i) to (iii)).
Even the rounding differs between the two groups. An indexed amount in subsection (b)(2)(A) that is not a multiple of $10 is rounded to the nearest multiple of $10, while the disqualified income threshold in subsection (i)(1) that is not a multiple of $50 is rounded to the next lowest multiple of $50 (26 U.S.C. 32(j)(2)(A) and 32(j)(2)(B)).
The current-year figures come from the IRS’s own tables for the filing year rather than from the statute (IRS, Earned income and Earned Income Tax Credit (EITC) tables).
Who Is an Eligible Individual
There are two routes into the credit, and the second carries three conditions. The term eligible individual means any individual who has a qualifying child for the taxable year, or any other individual who does not have a qualifying child for the taxable year if that individual’s principal place of abode is in the United States for more than one-half of the taxable year, if that individual, or if married either the individual or the spouse, has attained age 25 but not attained age 65 before the close of the taxable year, and if that individual is not a dependent for whom a deduction is allowable under section 151 to another taxpayer for any taxable year beginning in the same calendar year (26 U.S.C. 32(c)(1)(A)).
There is also a rule preventing the same person counting twice. If an individual is the qualifying child of a taxpayer for any taxable year beginning in a calendar year, that individual shall not be treated as an eligible individual for any taxable year of that individual beginning in the same calendar year (26 U.S.C. 32(c)(1)(B)).
A widely repeated lower age limit was temporary and its window has closed. The provision reducing the minimum age below 25 applied in the case of any taxable year beginning after December 31, 2020, and before January 1, 2022 (26 U.S.C. 32(n)). Guidance written during that window still circulates.
What Counts as Earned Income
The term earned income means wages, salaries, tips, and other employee compensation, but only if those amounts are includible in gross income for the taxable year, plus the amount of the taxpayer’s net earnings from self-employment for the taxable year within the meaning of section 1402(a), those net earnings being determined with regard to the deduction allowed by section 164(f) (26 U.S.C. 32(c)(2)(A)).
Three exclusions follow it, and the first is the one that catches preparers in nine states. The earned income of an individual shall be computed without regard to any community property laws, no amount received as a pension or annuity shall be taken into account, and no amount to which section 871(a) applies, relating to income of nonresident alien individuals not connected with United States business, is taken into account (26 U.S.C. 32(c)(2)(B)(i) to (iii)). The split that this instruction switches off is described in community income.
Investment Income Disqualifies Outright
This is a cliff, not a taper. 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 threshold in that paragraph (26 U.S.C. 32(i)(1)).
Disqualified income means interest or dividends to the extent includible in gross income for the taxable year, interest received or accrued during the taxable year which is exempt from tax imposed by that chapter, the excess of gross income from rents or royalties not derived in the ordinary course of a trade or business over the deductions clearly and directly allocable to it plus interest deductions properly allocable to it, the capital gain net income of the taxpayer for the taxable year, and the excess of aggregate income from all passive activities over the corresponding losses (26 U.S.C. 32(i)(2)).
Tax-exempt interest is inside that list. A client whose only investment income is municipal bond interest is not outside the test because the interest is not taxed.
The Identification Rule Carries a Scope Phrase
Read the opening words before applying it anywhere else. Solely for purposes of subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration, other than a social security number issued under the clauses of section 205(c)(2)(B)(i) of the Social Security Act that the paragraph names, on or before the due date for filing the return for the taxable year (26 U.S.C. 32(m)).
The IRS states the practical consequence directly. To qualify for the EITC, the taxpayer, the spouse if filing jointly, and the child claimed must have a valid Social Security number issued on or before the due date of the tax return including extensions, and an SSN is not valid for the EITC if it was issued after that date, or if it was issued solely to apply for or receive a federally funded benefit and does not authorize the holder to work (IRS, Who Qualifies for the Earned Income Tax Credit (EITC)).
No other identifier substitutes. The IRS answers it flatly for the adoption number: you can only use an SSN to claim the Earned Income Tax Credit (IRS, Adoption Taxpayer Identification Number (ATIN)), a point also covered in adoption taxpayer identification number.
The IRS’s Own Qualifying List
The IRS lists what a taxpayer must do to qualify. They must have earned income, have investment income below the limit, have a valid Social Security number by the due date of the return including extensions, be a U.S. citizen or a resident alien all year, not file Form 2555, Foreign Earned Income, and meet certain rules if separated from a spouse and not filing a joint return (IRS, Who Qualifies for the Earned Income Tax Credit (EITC)).
The same page notes that the EITC has special qualifying rules for military members, clergy members, and taxpayers and their relatives with disabilities (IRS, Who Qualifies for the Earned Income Tax Credit (EITC)), so the list above is the general case rather than the whole of the law.
Common Questions
Yes. Section 32 sits in Subpart C of Part IV of Subchapter A, headed Refundable Credits (26 U.S.C. 32). A taxpayer with no tax liability can still receive it.
Yes, through the second route, and it carries three conditions: a principal place of abode in the United States for more than one-half of the taxable year, having attained age 25 but not 65 before the close of the taxable year, and not being a dependent for whom another taxpayer is allowed a deduction under section 151 (26 U.S.C. 32(c)(1)(A)(ii)). The credit percentage for that case is 7.65 rather than 34 or more (26 U.S.C. 32(b)(1)).
Not gradually. Exceeding the disqualified income threshold denies the credit entirely for the year (26 U.S.C. 32(i)(1)), and staying below it does nothing to the amount.
At the disqualification tests rather than at the arithmetic. Software computes the credit from earned income and family size without difficulty. What has to be checked by hand is whether every social security number was issued by the due date and is valid for work, whether the disqualified income total, including tax-exempt interest and capital gain net income, is under the threshold, and whether a separated client meets the separate-return rules. Each of those is a yes or no that removes the whole credit, and none of them is visible in the computed figure.
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