The Earned Income Tax Credit (EITC) is a tax benefit for working people who have low to moderate income. It provides a tax credit that is treated like tax withholding: it goes to pay an individual’s tax liability, and any excess is paid to the individual in the form of a tax refund.
There are several requirements to qualify for the EITC; most important is having earned income. Many taxpayers overlook the fact that long-term disability benefits received prior to the minimum retirement age are treated as earned income for purposes of computing the EITC.
Earned income for EITC purposes includes the following amounts:
- The amount of any disability benefits attributable to the employer’s payment of disability policy premiums. However, nontaxable disability income from policies whose premiums the employee paid and Social Security benefits are not “earned income” for purposes of the EITC.
- Long-term disability benefits to an individual who is retired on disability are only earned income until the individual reaches the minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled.
The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases until it reaches a plateau, where it remains constant at the maximum credit amount until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage, and no credit is allowed once the income exceeds the top of the phase-out range. The following table illustrates the values for computing the credit for 2017 for taxpayers with no qualifying children.
Earned Income and AGI Limits
Earned income and adjusted gross income (AGI) must each be less than:
Investment Income Limit
Investment income must be $3,400 or less for the year.
Maximum Credit Amounts
The maximum amount of credit for Tax Year 2016 is:
$6,269 with three or more qualifying children
$5,572 with two qualifying children
$3,373 with one qualifying child
$506 with no qualifying children
| If filing… | Qualifying Children Claimed | |||
|---|---|---|---|---|
| Zero | One | Two | Three or more | |
| Single, Head of Household or Widowed | $14,880 | $39,296 | $44,648 | $47,955 |
| Married Filing Jointly | $20,430 | $44,846 | $50,198 | $53,505 |
The limits and the credit are substantially higher if the taxpayer also has qualifying children.
The IRS estimates that up to 1.5 million people who are receiving long-term disability retirement benefits are missing out on claiming the EITC. Those who qualify and have missed the credit in prior years can still amend their past three years of tax returns if filed within three years of the original April due date for the return.
Many individuals may not file a return because their income is below the filing threshold and therefore miss out on claiming the credit. Some people also mistakenly believe that receiving the EITC may impact their eligibility for Social Security disability benefits, Medicaid, food stamps, or housing assistance.
If you have questions related to the EITC, please give this office a call.
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