How Tax Reform Changed the Earned Income Credit

The Earned Income Tax Credit (EITC) is a refundable tax credit designed for low-to-moderate-income working individuals and families. Its purpose is to reduce the amount of tax owed and potentially result in a refund, supplementing wages for those who qualify. Because the credit serves as a significant anti-poverty tool, it is often a focal point in discussions about tax policy. Lawmakers periodically adjust its parameters, such as eligibility rules and credit amounts, which means the rules for claiming the credit can shift from year to year. The credit’s structure has seen both temporary and permanent alterations in recent years, making it important for taxpayers to understand the current requirements.

Foundational EITC Eligibility Rules

A core rule for the EITC is the presence of earned income, which includes wages, salaries, tips, and other taxable employee pay, as well as net earnings from self-employment. Income from sources like interest and dividends is considered investment income, and there is a limit on how much a taxpayer can have and still claim the credit.

The taxpayer, their spouse if filing jointly, and any qualifying children must each have a Social Security Number (SSN) that is valid for employment. Taxpayers using an Individual Taxpayer Identification Number (ITIN) are not eligible for the federal EITC. Additionally, the taxpayer must be a U.S. citizen or a resident alien for the entire year and have a primary residence in the United States for more than half of the year.

Filing status is another factor. While married individuals must typically file a joint return, a permanent change allows some separated spouses to claim the credit on a separate return. To qualify for this exception, the taxpayer must not file a joint return, have a qualifying child living with them for more than half the year, and either live apart from their spouse for the last six months of the year or be legally separated under a written agreement.

The rules for a “Qualifying Child” are specific. To be considered a qualifying child, an individual must meet four tests:

• Relationship: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepsibling, or a descendant of any of them, such as a grandchild or niece.
• Age: The child must be under age 19 at the end of the tax year, under age 24 if a full-time student, or any age if permanently and totally disabled.
• Residency: The child must have lived with the taxpayer in the United States for more than half of the year.
• Joint Return: The qualifying child cannot have filed a joint return for the year, unless it was filed only to claim a refund of income tax withheld or estimated tax paid.

Significant Temporary Reforms to the EITC

For the 2021 tax year, the American Rescue Plan Act (ARPA) introduced substantial but temporary changes to the EITC. The most significant reform was aimed at workers without qualifying children, who saw their maximum credit increase from $543 to $1,502 for 2021. Eligibility for this group was also broadened for that year only.

The minimum age to claim the credit was lowered from 25 to 19 for most workers, with an exception for former foster youth and qualified homeless youth who could claim it at age 18. Furthermore, the upper age limit of 64 was eliminated for 2021, allowing workers aged 65 and older to claim the credit.

The temporary reforms also increased the limit on investment income to $10,000 for the 2021 tax year. A “lookback” provision also allowed taxpayers to elect to use their earned income from 2019 to calculate their 2021 EITC if it resulted in a larger credit. This was a response to income reductions caused by the economic conditions of the time.

The Current EITC Landscape

Beginning with the 2022 tax year, the temporary ARPA reforms expired, causing the rules to revert to their pre-ARPA state. The expanded credit and broader eligibility for workers without qualifying children ended. The maximum credit for this group fell from its 2021 peak of $1,502 to $670 for the 2025 tax year.

The age requirements for workers without children also returned to the previous rules. To be eligible, a worker without a qualifying child must be at least 25 years old but under 65 at the end of the tax year.

A more permanent reform affecting the EITC came from the Tax Cuts and Jobs Act of 2017. This legislation changed the method used to adjust tax parameters for inflation, replacing the traditional Consumer Price Index (CPI) with the Chained CPI (C-CPI). The Chained CPI generally grows more slowly than the traditional CPI.

This means that annual inflation adjustments to the EITC’s income thresholds and maximum credit amounts are smaller than they would have been under the previous method. Over time, this slower growth, a concept known as “bracket creep,” may cause the credit to phase out at relatively lower real income levels, gradually eroding its value. For tax year 2025, the investment income limit is $11,950.

Information Required to Claim the EITC

To claim the EITC, taxpayers must gather specific information and documents before filing their tax returns. Filers will need birth dates for everyone listed on the return and all documents that report their income for the year. This includes Forms W-2 from employers and various Forms 1099, such as Form 1099-NEC for nonemployee compensation or Form 1099-K for payments from third-party networks.

For those who are self-employed, it is important to have organized records of all business-related income and expenses to accurately calculate net earnings from self-employment.

When claiming the EITC with a qualifying child, taxpayers must complete and attach Schedule EIC to their Form 1040. To fill out this schedule, the taxpayer needs the child’s full name, SSN, year of birth, relationship, and the number of months the child lived with them.

While documents proving a child’s residency, such as school, medical, or social service records, are not submitted with the return, they should be kept. The IRS may request these records later to verify eligibility, and having this documentation available can help expedite any inquiry and prevent refund delays. Proof of relationship, like birth certificates, and proof of a child’s disability should also be retained.