RMI Tax Series: Earned Income Credit to be Cut?

Among the many taxes being considered for the Congressional chopping block in 2013 is the Earned Income Credit (EIC). This tax credit has benefited many moderate and low income families for close to four decades. But why does Washington feel that this tax needs to be altered?

The EIC was put in place back in 1975 as a way to offset people’s Social Security taxes while at the same time providing them an incentive to work. The purpose of the tax is to help low and moderate income level folks who earn their money through either a job or self-employment make up for the money they pay in Social Security taxes. However, to get the tax credit, there are certain criteria that need to be met.

Since the EIC was designed as an incentive for people to work, only those who have earned income from working a job or from being self-employed can qualify for the tax credit. Investment income does not disqualify you from taking the credit, as long as it’s not above a specific amount. For 2012, investment income could not be more than $3,100, for example.  Income from IRA distributions is not counted as earned income or investment income, and thus does not play a part in your eligibility for the EIC.

The EIC is meant to help moderate- and low-income wage earners, so each year there is a maximum earnings limit based on your filing status and family size. For example, in 2012 a married couple filing jointly with three or more qualifying children could take the EIC if they earned less than $48,279, according to the Internal Revenue Service. A single person without children could take the credit if he/she earned less than $13,440.

Most people qualify for the EIC because they have one or more children living in their home who meet the criteria of a qualifying child. Generally, qualifying children are not yet 18 and living at home. Children with disabilities and adopted children can fall under the definition of a qualifying child as well.

People earning their income through wages or self-employment, are between the ages of 25 and 65 and do not have children can still qualify for the EIC if their income is below a specific level. The IRS provides a brief worksheet(click here) with questions and answers to help you determine if you’re eligible to take the credit.

“The loss of the EIC could hit taxpayers hard, particularly families. Those families with three children receive on average up to $5,000 a year in EIC breaks. If all these sweeping changes occur in 2013, those who now qualify for EIC could find they don’t qualify later,” said noted author and tax expert Julian Block.

Losing this tax credit to the fiscal cliff could be devastating to those pre-retirees with children, using the tax credit to pay for life essentials. Since it comes in a lump sum, many of them re-invest it in things like their children’s education. All this would end with the fiscal cliff. 

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