How to Calculate Earned Income Credit

Unlike a tax deduction, which lowers your taxable income, the Earned Income Tax Credit is a deduction directly against the taxes that you owe. It's meant to help out low- to moderate-income individuals and families. If you think you fall into this category, it's worth going through the calculations, because if the credit is more than the taxes you owe, you will receive a refund.

Add up all of your taxable earned income. This includes wages paid to you by someone you worked for or earnings you had from a business you run or own. It also includes long-term disability benefits and net earnings if you're self-employed.

Determine if you have a qualifying child. To qualify, the child needs a Social Security number, must have a direct legal relationship to you (such as son, daughter, adopted child, half brother or step-sister), be younger than you, and be either younger than 19 or be a full-time student and younger than 24. Additionally, the child must live with you.

Compare your earned income and the number of qualifying children to the EIC limits. If you have three or more qualifying children your earned income limit is $43,998 ($49,078 for married filing jointly). For two children the limit is $40,964 ($46,044 for married filing jointly). For one qualifying child the limit is $36,052 ($41,132 for married filing jointly), and if you have no qualifying child the income limit is $13,660 ($18,740 for married filing jointly). All figures are as of 2012; check the IRS website for the most updated information.

Use IRS tax Form 1040, Form 1040A or Form 1040EZ to claim your EIC. If you are using Form 1040, you must use Worksheet A if you had no self-employment income and did not file Schedule SE as a church employee or clergy. Use EIC Worksheet B if you had self-employment income or filed Schedule SE as a church employee or clergy.

Complete Schedule EIC if you are claiming one or more qualifying children. Include the schedule with your tax return.

File a tax return. You will not receive your EIC unless you actually file a return, even if you do not owe taxes or otherwise aren't required to file.

 

About the Author

Diane Stevens' professional experience started in 1970 with a computer programming position. Beginning in 1985, running her own business gave her extensive experience in personal and business finance. Her writing appears on Orbitz's Travel Blog and other websites. Stevens holds a Bachelor of Science in physics from the State University of New York at Albany.