What is Earned Income Credit?

The IRS gives out billions of dollars every year for earned income credit. Why do they do that? They are not known at all to be generous or giving, so what is the reason behind this?

The government wants to keep people off the welfare system and this is one of the ways they do that.

Since 1975, the IRS Earned Income Credit (EIC) provides matching funds of up to 45% of low- and moderate-income workers’ wages. They can use this credit to either lower their taxes or more commonly to get a nice-sized refund.

The promise of matching funds encourages people to get out and go to work or putting in more hours since they know that for every dollar they work for they can earn as much as $1.45 (or more if their state has an EITC program ).

    The original credit had three parts: The basic credit for one or two children, the Health Insurance credit, and the Extra credit for a Child Born in that tax year. This was changed in 1994 when the health insurance credit and the new baby credit where removed. But in that same year it was expanded to include people who do not have children.

The credit for those without children is 7.65% equal to the amount of social security and medicare tax paid. So it's like the government is helping them pay for the employment taxes since they earn too little to afford it.

Low income earners with children have much more expenses so the government pays them even more than the employment taxes so it becomes like a negative income tax for them and they will get a refund instead of paying tax.

In 2010 26.8 million household received the EITC. The total credits issued was valued to $59.5 billion dollars making it one of the largest cash assistance programs for the low income.

The Earned Income Tax Credit took 6.6 million people out of poverty; half of them are children. The reason why the EIC is a favorite by law makers is that the administration costs are very low compared to other anti poverty programs. The cost is less than one percent compared to food stamps which is about 15%.

Only four out of five of those eligible apply for this credit causing millions of dollars of unclaimed refunds. The reason people do not claim this credit is because they are not aware of the law (they live in rural areas or don't speak or understand English) OR they do not know that they are eligible (like the self-employed, grandparents raising grandchildren, and workers without children).

Here you can get more information needed to file for the Earned Income Tax Credit so that you will get the credit you deserve:

Are you eligible for the EITC?

What is a qualifying child for IRS earned income credit?

See about how much you can get by using this chart and calculator

Figure the exact amount with the EIC worksheet

Claim the credit with schedule EIC

Tips to help you get the maximum credit

Earned income tax credit tables for 2010, 2011, 2012 and 2013

Why the advanced earned income credit was stopped

Calculate earned income tax credit for your state with these simple calculators.

IRS Publication 596

Updated January 6, 2014

› Earned Income Credit

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