The U.S. government specifically designed the earned income tax credit for low-income individuals and families, so if you have any investment income, qualifying for it might seem like a contradiction in terms. But the Internal Revenue Service doesn't prohibit you from investing and planning for a rainy day. It only places limits on how much income you can earn from investments and still claim the credit.
Investment Income Allowed
The IRS allows you to earn up to $3,100 from investments during the tax year and still qualify for the EITC as of publication. This $3,100 isn't over and above the earned income you receive. It's included in your total adjusted gross income, or what's left after you make all other deductions. When you combine your investment income with your earned income, the total must meet certain requirements.
Additional Income Rules
The amount of money the IRS allows you to earn before it precludes you from claiming the EITC varies depending on the number of children you have. If you have no children, your AGI must be less than $13,460, or $18,470 if you're married and filing jointly, as of publication. This increases to $43,352 if you have three children or more, or $48,362 if you're married. You can't have just investment income to qualify for the credit; your AGI must include some earned income as well. Money you receive from self-employment counts as earned income. You must also include any income you receive from taxable disability and union strike benefits.
If you're married and choose to file separately rather than jointly, the IRS won't let either you or your spouse claim this credit. If you don't have children, no one else can be eligible to claim you as a dependent on another tax return. You must have lived in the United States for at least six months of the tax year and be older than 25, but younger than 65.
The credit increases with the number of children you have, and can result in money back to you if it amounts to more than the taxes you owe. For example, if you have two children, and if you and your spouse earned less than $45,373 during the tax year, including investment income and earned income from all other sources, you're eligible for a $5,036 credit. If you only owe taxes of $2,500, the IRS will send you a refund of $2,536. The American Recovery and Reinvestment Act increased some of the income limits for the 2011 tax year, but the investment income ceiling of $3,100 still applies. The provisions of the 2010 Tax Act, which governs taxpayers' eligibility for the EITC, expires in December 2012. If you're planning to claim the credit after that, check with a tax professional to make sure you still qualify.
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