 Income tax 2022-2023 earned income tax credit the EIC Overview. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Most of this information can be found in the form 1040 instructions tax year 2022 you can find at the IRS website irs.gov irs.gov looking at the income tax formula we're at the bottom half looking at the credit section remembering the first half of the income tax formula is in essence an income statement although a strange one ending at taxable income similar to the bottom line of an income statement net income we're going to calculate the tax on that not using a flat tax not multiplying by one rate in other words but using a progressive tax structure to get to the tax before credits and other taxes then we're going to deal with the credits and other taxes possibly self-employment tax for example and then we're going to have the amounts that we paid in that we're going to deal with which is going to be in the form of estimated tax payments or withholdings to finally get to the tax refund or tax due also remember when we look at these credits that they're similar to deductions and that we like both credits and deductions however if we had one dollar credit versus one dollar deduction we typically want the credit because the credit will maximize that full dollar worth of benefit typically whereas the deduction will simply reduce the taxable income which is good but will only get a benefit based on our tax rate also remember that these credits are broken out into non-refundable and refundable components generally and that is because a non-refundable credit will not take us below zero is the general idea with the tax liability the refundable credits are a component that's really beyond taxes they're using the tax code as a benefit program to get quote a refund end quote when it's not really a refund it's kind of like a benefit program so we have that concept of refundable and non-refundable credits now when we think about the earned income credit remember that most economists really like the earned income credits because it tries to incentivize work the credit actually goes up as you have earned income up to a certain threshold and then it goes back down so you really want to think of the credit as kind of a curve it's going to go up as your income goes up and then the maximum credit goes down at some point in time once you maximize out the curve and then there's different curves depending on how many children we have for example so although the earned income credit has a good characteristic that it tries to incentivize work it is also quite confusing in attempting to incentivize work that's one of the problems with a lot of these lower income focused types of credits the problem is that they actually backfire a lot of times instead of helping people get on their feet and be self-sufficient they actually lock lock people into being dependent on the credit or whatever the benefit program is because once they start earning income and becoming self-sufficient they lose the benefits entirely and they're actually better off with the benefits than earning income which isn't good so so what we what the credit should be designed to do you would think is to be something that's going to help people become self-sufficient and that's what the credit tries to do but you could see how complicated it also makes the credit so for example if we look at a common table like this it says the number of children on the left we can imagine a different curve per number of children which are going to be a factor involved we'll get into this in more detail in a second but just an overview of a chart you commonly see then we have the maximum earned income tax credit if you have zero children which is much lower than of course the maximum of the three children that you can get which is quite a substantial credit 6935 versus 560 now if you're at zero children the max agi single or head of household file filers meaning your income threshold your adjusted gross income if it goes over 16 480 you basically are no longer able to get the credit but note that that's that number is generally represented as the threshold where you don't get any of the credit anymore and what we really want to also see is where does the credit become maximized at what income level is it going to hit its peak at 560 and then also the level that it's going to go back down to zero we're not going to get any benefit and then for the max agi for married it's 22 610 so it's pretty low for no children your agi threshold if you have one child the maximum credit is 3733 the max agi single or head of household is 43 492 which is a fairly significant level but again that's the top level where it phases out basically completely generally instead of the peak where's the peak of the curve where's my agi maximized where i'm going to get that 3733 and then it's 49 622 for married filing joint two filers the maximum goes up significant or two children the maximum goes up significantly to 6164 the max agis 49 399 same caveat caveats for married 55 529 and over three children notice it caps at three so you no more benefits for the earned income tax credit for more children past three the maximum credit could be 6935 for the income of 530 57 53,057 but that's the maximum again the maximum before you lose the credit entirely not the point in time that you would be maximizing the credit and then 59 187 for married filing joint filers all right so that's the general table you typically see let's get into it in a little bit more detail what is the ec the earned income tax credits the ec is a credit for certain people who work the credit may give you a refund even if you don't owe any tax or didn't have any tax withheld so in other words the earned income tax credit is generally aimed at lower income individuals but it's trying to incentivize people to work so you have to have some earned income that's why it says you work you have some earned income in order to get the credit if you have no earned income then you shouldn't be generally requalified for the credit is the general idea now note that if you don't if your income is below a certain threshold the general thought process or the question you might have is do i have to file at all do i have to file at all if my income is below a certain threshold well if your income is below the standard deduction you would think you don't have to file because the iris isn't going to come after you because you don't owe them any money because you're under the standard deduction you have zero taxable income in essence that's a different question however then should i file would it be beneficial to file and oftentimes the answer there is going to be yes even if you didn't have any withholdings from the w2 that could possibly be refunded to you because of these refundable credits such as the earned income tax credit and the child tax credit and also oftentimes if you're filing before the due date i think including extensions you might be able to get access to free software from third party providers looking for that software on the iris website iris.gov and so it's worth checking out if it would be beneficial to file if you can get access to the free software can help you calculate this earned income tax credit even though it is a complicated credit to calculate all right so to take the ic the earned income credit follow the steps below complete the worksheet that applies to you or let the irs figure the credit for you now again generally software is quite useful and helpful to walk you through the steps to figure out the credit you can kind of double check it and deconstruct it and you might be able to get access to free software even low income individuals for on the iris website free file so if you have a qualified child complete and attach schedule e ic so if you have at least one child who meets the conditions to be your qualified child for purposes of claiming the ic earned income tax credit complete the attached schedule e ic even if that child doesn't have a valid ssn social security number see schedule e ic for more information including how to complete schedule e ic if your qualified child doesn't have a valid ssn social security number caution if you take the ic earned income tax credit even though you aren't eligible and it is determined that your error is due to reckless or intentional disregard of the e ic rules or an income credit rules you won't be allowed to take the credit for two years even if you are otherwise eligible to do so so the issue here is like any kind of benefit program the this program is going to be something that is subject to people trying to get an invalid refund or flat out committing fraud identity theft is an issue with it as well because you know it's money it's kind of like free money to to a extent because you're not getting a refund from it you're actually getting a benefit program to it so people can people take advantage of it which of course means that the iris has to balance between the amount of advantage people are going to take from it and how they're going to lock down that while still being able to get the benefits uh related to the credit related to the credits the pros outweighing the cons so if you fraudulently take the e ic you won't be allowed to take the credit for 10 years so fraud would be intent you intend they find that you intentionally did this it's it's difficult thing to to to prove intention but obviously if they if they say that intent was involved then uh 10 years see form 8862 who must file later you may also have to pay penalties so tip refunds for returns claiming the earned income tax credit can't be issued before mid february 2023 so so note the other thing that's involved with this credit is they're trying to commit or reduce fraud identity theft people find fraudulent tax returns for example and trying to claim these refundable credits because again you can basically possibly get the credit even without any refund so they're so without any withholdings so that's a huge fraud problem so to try to mitigate that they need a little bit more time to process the paperwork over there and hope and that's i believe something that could help them or is helping them and the reason for delaying the refund pass what you might be able to get if you weren't claiming that particular credit so this delay applies to the entire refund not just the portion associated with the earned income credit so you might be thinking hey why can't you just give me part of the reform fund that's not part of the credit well that they could i guess but that would be kind of complicated to do take a lot more time and effort so they're not doing that