History

• The EITC was established in 1975 as a welfare reform measure. It was intended to benefit low income workers with children by offsetting their payroll taxes and encouraging these workers to remain employed. Over the years, congress has added various financial supplements to the credit, and has expanded eligibility to workers without children.
  
  

Significance

• One unique aspect of the EITC is that it is a refundable tax credit. Most tax credits reduce your tax liability until it reaches zero, but you are not entitled to a refund of any credit above your actual liability. But EITC is different: If your EITC is greater than your tax liability, the balance is returned to you either as a tax refund or as an addition to your regular paycheck.
  
  

Eligibility

• To be eligible for the EITC, you and your family must meet certain income guidelines. As of the 2009 tax year, those income levels range from just over $13,000 for a single filer with no children to more than $48,000 for a married couple with three or more children. If you are claiming EITC because you are caring for a child, the child must be related to you in an approved way--either your biological, adopted, step or foster child or a grandchild, brother, sister, niece or nephew. You must also be able to claim the child as a dependent on your tax return. Finally, the child must be either under the age of 19, under the age of 24 and a full-time student, or "permanently and totally disabled."
  
  

Time Frame

• Workers usually receive their EITC with their regular tax refund. If you have a child, you may also have the option of having your credit paid to you in your paycheck throughout the year. If you chose the latter option, you will need to complete IRS form W-5 and give it to the payroll department at work. Please keep in mind that if you do receive your EITC in your paycheck, you still need to file your tax return each year, as you may be entitled to additional EITC money as part of your tax refund.
  
  

Obtaining the Credit

• To claim your EITC as part of filing your annual tax return, you will need to do one of the following: Complete the EIC Worksheet, which is included in your 1040 tax forms, use the online Earned Income Tax Credit tool or ask the IRS to figure the credit for you. If you ask the IRS to figure your EITC for you, you will need to follow specific instructions for making this request. The instructions can found in Chapter 4 of IRS Publication 596.