Smart Tax Planning
KEY POINTS
- In 2022, roughly 23 million filers received $57 billion from the earned income tax credit, a tax break for low- to moderate-income workers.
- But nearly 1 in 5 eligible taxpayers don't claim the credit, which averaged $2,541 last year, according to the IRS.
- For tax year 2023, the EITC is worth up to $7,430 for a family with three or more children, up from $6,935 in 2022.
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Tens of millions of Americans file tax returns every year — and many are missing a "valuable credit," according to the IRS.
In 2022, roughly 23 million filers received $57 billion from the earned income tax credit, or EITC, a tax break for low- to moderate-income workers.
But nearly 1 in 5 eligible taxpayers don't claim the EITC, which averaged $2,541 in 2022, IRS Commissioner Danny Werfel told reporters during a press call last week.
"This is a lot of money" that millions of Americans are eligible for "and some simply overlook it," he said.
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For tax year 2023, the EITC is worth up to $7,430 for a family with three or more children, up from $6,935 in 2022, according to the IRS. Eligible workers between ages 25 and 64 without a qualifying child can receive up to $600.
By law, if you claim the EITC, you should receive a refund no earlier than Feb. 27, assuming you've filed an error-free return and picked direct deposit for payment.
How the earned income tax credit works
"The credit is reasonably complex," said Steven Hamilton, assistant professor of economics at The George Washington University. "It has a lot of eligibility requirements."
For tax year 2023, you may qualify with wages from employment below $56,838 — $63,398 if married filing jointly — and investment income under $11,000, according to the IRS. The income limits decrease, depending on the number of qualifying children.
These thresholds use adjusted gross income, which is your total income after subtracting pretax 401(k) contributions minus "adjustments," such as certain pretax individual retirement account contributions and student loan interest.
The EITC is refundable, meaning you can still get a refund even without taxes owed. You can use this tool to check EITC eligibility.
Click here to view interactive content
There are also "qualifying child" guidelines, which can be complicated, including relationship, age and residency tests, Hamilton said.
However, the IRS encourages filers to use resources such as Free File, a tax professional or the agency's free tax prep programs to claim the credit.
There's a 'high improper payments rate'
"Millions of eligible taxpayers fail to claim the EITC, while other taxpayers claim amounts for which they are not eligible, leading to a high improper payments rate," National Taxpayer Advocate Erin Collins wrote in the 2023 Purple Book of legislative recommendations.
While higher earners are more likely to face an audit, EITC claimants see audits at a 5.5 times higher rate than the rest of U.S. filers, partially due to improper payments, according to a December report from the Bipartisan Policy Center.
This has contributed to racial disparities in audit rates, with Black Americans about three to five times more likely to see an audit, according to a 2023 Stanford University study. The IRS confirmed these findings in May 2023 and said the agency has dedicated "significant resources" to address the issue.
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