The EITC primarily benefits low-income families with children. Taxpayers age 25–64 who do not have qualifying children are eligible for a small credit.
Income: To qualify for the EITC, taxpayers must have earned income, and it must be less than the program's maximums per household. To qualify in 2012, earned income must be less than
- $45,060 ($50,270 married filing jointly) with three or more qualifying children
- $41,952 ($47,162 married filing jointly) with two qualifying children,
- $36,920 ($42,130 married filing jointly) with one qualifying child
- $13,980 ($19,190 married filing jointly) with no qualifying children
In addition, investment income cannot exceed $3,150.
Children: A "qualifying child" must meet the program's age, relationship, and residence tests.
Age: The child must be younger than 19 or must be 19–23 and either a full-time student during at least five months of the calendar year or totally and permanently disabled.
Relationship: The child must be the taxpayer's child or stepchild (by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of those. If a parent does not claim the child for the tax credit, another relative who lives with the child most of the year may do so.
Residence: The child must live with the taxpayer for more than half the tax year. Exceptions may apply for kidnapped children, temporary absences, and children who were born or died during the year.
Immigrants: Everyone in the tax unit must have a valid Social Security number. The taxpayer (and spouse if filing jointly) must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien.
The EITC equals a fixed percentage of earnings from the first dollar of earnings until the credit reaches a maximum. Both the percentage and the maximum credit depend on the number of children in the family. As the figure below shows, the credit then stays flat at that maximum as earnings continue to rise, eventually reaching a phaseout range. From that point, the credit falls with each additional dollar of income until it disappears entirely.
The dashed lines in the figure represent portions of the EITC that have not been made permanent, specifically the higher credit rates for families with at least three children and the higher phaseouts for married couples.
Note: Figure assumes all income comes from earnings.
The EITC is fully refundable: any excess beyond a family's income tax liability is paid as a tax refund. The credit is indexed annually for inflation. In 2012, the maximum EITC ranged from $475 for tax units with no children to $5,891 for tax units with at least three children.
Roughly 30 percent of all benefits from the EITC go to families in the bottom 20 percent of the income distribution, and another 54 percent go to families in the next highest bracket. Almost no families in the top 40 percent of the income distribution benefit from the EITC.
Estimates of participation on returns filed in 1990 show that between 80 and 86 percent of eligible taxpayers claim the credit. Research consistently finds that the EITC encourages people, particularly single mothers, to begin working for pay. The EITC tends to provide temporary benefits. Analysts found that, over an 18-year period, nearly two-thirds of recipients received the credit for only one or two years at a time.