CHI DUONG – EXTRA CREDIT – TAX TOPIC
EARNED INCOME CREDIT 2018
The United States federal earned income credit is a refundable tax credit for low- to moderate-income
working individuals and couples, particularly those with children. The amount of EITC benefit depends
on a recipient’s income and number of children. The purpose, eligibility requirement and computation
of earned income credit are detailed as below
1. Purpose of regulations on earned income credit:
- The earned income credit provides income tax equity to the working poor.
- The credit helps to offset other Federal taxes, such as the gasoline tax, that impose a
relatively larger burden on low-income taxpayers.
- The credit encourages economically disadvantaged individuals to become contributing
members of the workforce.
2. Eligibility requirements:
Who is qualified for earned income credit? They are taxpayer who must have earned income
from working for someone or from running or owning a business or farm and meet basic rules
- In regards to taxpayer with “qualifying child”, the taxpayer must meet the earned income
and AGI thresholds regulated based on his/her status and number of children.
- In regard to taxpayer without “qualifying child”, the earned income credit is also available to
certain workers without children. It is available only to taxpayers ages 25 through 64 who
cannot be claimed as a dependent on another tax return. The taxpayer also has to meet the
earned income and AGI thresholds regulated based on his/her status
3. How to compute tax credit
• The earned income credit is determined by multiplying a maximum amount of
earned income by the appropriate credit percentage:
- Earned income includes employee compensation and net earnings from selfemployment; it excludes items such as interest, dividends, pension benefits, nontaxable
employee compensation, and alimony. In 2018, maximum amount of earned income
based on number of children as below:
No child ($ 6,780); one child (10,180); Two children (14,290); three and more children
(14,290)
- Credit percentage:
No child ($ 6,780); one child (10,180); Two children (14,290); three and more children
(14,290)
- However, the maximum earned income credit is phased out completely if the taxpayer’s
earned income or AGI exceeds certain thresholds, the greater of earned income or AGI
exceeds $24,350 in 2018 for married taxpayers filing a joint return ($18,660 for other
taxpayers), the difference, multiplied by the appropriate phaseout percentage, is
subtracted from the maximum earned income credit.
• IRS issues an Earned Income Credit Table for the determination of the appropriate amount
of the credit.
-----------------------------------------Sources:
-
South-Western Federal Taxation 2019 – Individual Income Tax 42nd Edition. David M.
Maloney/William A. Raabe/William H. Hoffman, Jr./James C. Young.
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-incomelimits-maximum-credit-amounts-next-year
https://en.wikipedia.org/wiki/Earned_income_tax_credit