Earned Income Tax Credit (EITC) Overview

The Earned Income Tax Credit is one of the most important refundable credits in the tax code, meaning it can reduce tax liability below zero and result in a refund. For 2024, approximately 23 million eligible workers claimed over $64 billion in EITC benefits. The EA exam heavily tests EITC eligibility rules, income limits, and preparer responsibilities.

2024 EITC Maximum Credit Amounts and Income Limits

The EITC amount depends on filing status, earned income, and number of qualifying children. Here are the complete 2024 figures:

Investment Income Limit: For 2024, you cannot claim EITC if investment income exceeds $11,600. Investment income includes:

• Taxable interest
• Tax-exempt interest
• Dividends
• Capital gain net income
• Royalties and rental income from personal property
• Passive activity income

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What Qualifies as Earned Income?

Understanding what constitutes earned income is critical for EITC eligibility:

Earned Income INCLUDES:

Earned Income DOES NOT Include:

Combat Pay Election: Active duty military in combat zones receive nontaxable combat pay. Taxpayers may elect to include this as earned income if doing so increases their EITC. This election is made annually by including combat pay on the return.

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EITC Qualifying Child Rules

To claim a child for EITC, the child must meet ALL of these tests:

The ARRJ Tests (Age, Relationship, Residency, Joint Return)

Important Notes:

• There is NO support test for EITC (unlike the dependency exemption)
• The child must be YOUNGER than the taxpayer (or spouse if MFJ)
• "U.S." means the 50 states and D.C., NOT U.S. territories like Puerto Rico or Guam
• Temporary absences (school, medical care, military) count as time living with you

Tiebreaker Rules

If more than one person claims the same child:

1. Parent wins over non-parent
2. Parent with longer residency wins over other parent
3. Parent with higher AGI wins if residency is equal
4. Higher AGI wins if neither is a parent

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EITC Without Qualifying Children

Workers without qualifying children CAN claim EITC, but must meet stricter age requirements:

Requirements for Childless Workers (2024):

Age Exception: If married filing jointly, only ONE spouse needs to meet the age requirement.

2024 Limits Without Children:

• Maximum credit: $632
• Single/HOH income limit: $18,591
• MFJ income limit: $25,511

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Filing Status and Citizenship Requirements

Filing Status Restrictions

Key Point: Taxpayers filing MFS are always disqualified from EITC, regardless of circumstances.

SSN and Citizenship Requirements

• Valid SSN Required: You, your spouse (if MFJ), AND all qualifying children must have valid Social Security numbers issued by the due date of the return (including extensions)
• Valid for Employment: The SSN must be valid for employment (not just valid for benefits)
• ITINs Don't Qualify: Individual Taxpayer Identification Numbers (ITINs) do NOT satisfy this requirement
• No Nonresident Aliens: Taxpayers who are nonresident aliens at any time during the year cannot claim EITC (exception: MFJ with U.S. citizen/resident spouse who elects to be treated as resident)

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Tax Preparer Due Diligence Requirements

Paid preparers have significant obligations when preparing returns claiming EITC. The IRS actively enforces these requirements through penalties and "knock and talk" visits.

Form 8867 - Paid Preparer's Due Diligence Checklist

Paid preparers must complete and submit Form 8867 for every return claiming:

• Earned Income Tax Credit (EITC)
• Child Tax Credit (CTC) / Additional CTC / Other Dependent Credit
• American Opportunity Tax Credit (AOTC)
• Head of Household filing status

The Four KDCR Due Diligence Requirements

Due Diligence Penalty (2024)

The penalty for failing to meet due diligence requirements is $600 per failure for returns filed in 2024.

Multiple Failures Multiply: If a preparer fails due diligence on all four credits on a single return, the penalty is $600 x 4 = $2,400 for that one return.

Consequences Beyond Penalties

• Referral to Office of Professional Responsibility
• Criminal investigation for willful violations
• Injunction barring preparer from preparing returns
• Reputation damage from IRS "knock and talk" visits

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EITC Disallowance Rules

If the IRS denies EITC, there can be serious consequences:

Disallowance Periods

Form 8862 - Information to Claim Certain Credits After Disallowance

If EITC was denied for any reason other than math/clerical error, the taxpayer must file Form 8862 with the next return claiming EITC. This form documents that eligibility requirements are met.

Partial Disallowance Triggers Ban: If the IRS disallows EITC on even ONE child due to reckless/intentional disregard, the 2-year ban applies to ALL EITC claims.

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Schedule EIC

When claiming EITC with qualifying children, taxpayers must complete and attach Schedule EIC to Form 1040. This schedule requires:

• Child's name, SSN, year of birth
• Relationship to taxpayer
• Number of months child lived with taxpayer
• Whether child was a full-time student
• Whether child was disabled

Important: Schedule EIC must be completed BEFORE Form 8862 if reclaiming credit after disallowance.

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How EITC Works: Phase-In and Phase-Out

The EITC increases with earned income up to a maximum, then phases out as income rises:

1. Phase-in: Credit increases as earned income rises (workers keep more by earning more)
2. Plateau: Credit stays at maximum level
3. Phase-out: Credit decreases as income continues to rise
4. Zero credit: Income exceeds the threshold

This design encourages work at lower income levels while targeting benefits to those who need them most.

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EA Exam Tips for EITC

1. Memorize the income limits - Know the thresholds for 0, 1, 2, and 3+ children
2. Investment income limit - $11,600 for 2024 is a common trap
3. MFS is always disqualified - No exceptions
4. Age 25-64 for childless workers - Required only when claiming without children
5. More than half the year - Residency test is strict
6. $600 per failure - Due diligence penalty for 2024
7. Combat pay election - Military can CHOOSE to include it
8. No support test - Unlike dependency rules
9. Form 8867 - Required for EVERY return claiming EITC
10. 2-year and 10-year bans - Know the disallowance periods