To claim the EITC, a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Additionally, the taxpayer’s earned income must fall within certain ranges as the credit is subject to income phaseout. As the taxpayer’s adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount.
For 2016, a taxpayer is able to claim the EITC if:
- The taxpayer had three or more qualifying children and earned less than $47,955 ($53,505 if married filing jointly)
- The taxpayer had two qualifying children and earned less than $44,648 ($50,198 if married filing jointly)
- The taxpayer had one qualifying child and earned less than $39,296 ($44,846 if married filing jointly), or
- The taxpayer did not have a qualifying child and earned less than $14,880 ($20,430 if married filing jointly).
For 2016, the maximum amount of investment income a taxpayer can have and qualify for the credit is $3,400.
For 2016, the maximum amount of EITC 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
A qualifying child must meet satisfy four tests: (1) relationship; (2) age; (3) residency; and (4) joint return. Examples of a qualifying child are a taxpayer’s son, daughter, stepchild, foster child, or a descendant of any of them (for example, grandchild), or brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.
Special EITC rules apply to members of the U.S. Armed Forces. For purposes of the EITC, the term “Armed Forces” refers to officers and enlisted personnel in all regular and reserve units under the command of the U.S. Secretaries of Defense, Army, Navy, Marine Corps, Air Force, and Coast Guard.
Members of the U.S. Armed Forces do not have to report nontaxable pay for purposes of the EITC. They can elect to exclude from the EITC calculation the Basic Allowance for Housing (BAH), the Basic Allowance for Subsistence (BAS) and the amount of combat pay. Taxpayers must exclude all combat pay and not only a part of combat pay from earned income. A number of areas across the world have been designated as combat zones. These include Afghanistan, beginning Sept. 19, 2001; Somalia, beginning January 1, 2004; Yemen, beginning April 10, 2002, and other areas. The amount of a taxpayer’s nontaxable combat pay is reflected on the taxpayer’s Form W-2, in box 12, with code Q.
Example. Eugene, who serves in the U.S. Navy, and Karla are married and file a joint federal income tax return. The couple has one daughter, who is a qualifying child for purposes of the EITC. Eugene earned $10,000 in nontaxable combat pay. Eugene and Karla can elect to exclude the $10,000 in nontaxable combat pay from their calculation of the EITC or they can include the amount in the calculation of the EITC.