Deductions and Credits · Credits

Earned income tax credit

Two things make this credit different from the others on an individual return. It is fully refundable, so it is paid out whether or not there is any tax, which is why it is the most audited item on the form. And Congress made the preparer, not only the taxpayer, answerable for getting it right — with a penalty per failure and no ceiling.

The rule

The computation. The credit is the credit percentage of earned income up to the earned income amount, reduced by the phase-out percentage of the excess of adjusted gross income — or earned income if greater — over the threshold phase-out amount (IRC § 32(a)(1), (2)). In practice the amount is read from tables the Secretary prescribes under § 32(f). The 2026 figures are $664 with no qualifying child, $4,427 with one, $7,316 with two and $8,231 with three or more, for taxable years beginning in 2026^TY2026.

The plateau and the phase-out. The credit rises to its maximum at $8,680 with no qualifying child, $13,020 with one, and $18,290 with two or with three or more — the earned income at or above which the maximum credit is reached, for 2026^TY2026, holds there, and then falls away from $10,860 with no qualifying child and $23,890 with any number of qualifying children, or $18,140 and $31,160 respectively on a joint return, measured against adjusted gross income or earned income, whichever is greater (2026)^TY2026, reaching zero at $19,540 with no qualifying child, $51,593 with one, $58,629 with two and $62,974 with three or more — increased on a joint return to $26,820, $58,863, $65,899 and $70,244 (2026)^TY2026. The joint-return figures carry the § 32(b)(2)(B) increase, which is what prevents two working parents being worse off than one.

Eligible individual, with a child. Anyone with a qualifying child for the year (IRC § 32(c)(1)(A)(i)). No age test applies to the claimant.

Eligible individual, without a child. a principal place of abode in the United States for more than half the year, age at least 25 and under 65 before the close of the year — either spouse satisfies the age test on a joint return — and not being a dependent of another taxpayer (IRC § 32(c)(1)(A)(ii))^TY2026 These three conditions apply only to the childless claimant, and each of them is regularly tested.

Who is never eligible. A person who is themselves the qualifying child of another taxpayer for a year beginning in the same calendar year (IRC § 32(c)(1)(B)). Anyone claiming the § 911 foreign earned income exclusion (IRC § 32(c)(1)(C)). A nonresident alien for any portion of the year, unless a § 6013(g) or (h) election makes them a resident for the whole of it (IRC § 32(c)(1)(D)).

Earned income. Wages, salaries, tips and other employee compensation, but only to the extent includible in gross income, plus net earnings from self-employment within § 1402(a) computed with the § 164(f) deduction (IRC § 32(c)(2)(A)(i), (ii)). Five things are expressly outside it: community property allocations are ignored, no pension or annuity counts, no § 871(a) income of a nonresident alien counts, nothing earned while an inmate of a penal institution counts, and subsidised State work-activity payments do not count (IRC § 32(c)(2)(B)(i)–(v)). Then § 32(c)(2)(B)(vi) gives the section’s one election: a taxpayer may elect to treat § 112 combat pay as earned income. Electing can raise or lower the credit depending on where the taxpayer sits on the curve.

Qualifying child. A qualifying child within § 152(c), but determined without § 152(c)(1)(D) and without § 152(e) (IRC § 32(c)(3)(A)). Dropping § 152(c)(1)(D) removes the support test, so a child who supports themselves entirely can still be a qualifying child for this credit though not for the child tax credit. Dropping § 152(e) means the special rule for divorced parents does not apply — the credit follows residence, and a Form 8332 release moves the child tax credit without moving this one. Section 32(c)(3)(B) excludes a child who is married at the close of the year unless the taxpayer is entitled to claim them, and § 32(c)(3)(C) requires the principal place of abode to be in the United States.

Married claimants. The credit is allowed only on a joint return (IRC § 32(d)(1)). There is one exception, in § 32(d)(2)(B): a married individual who does not file jointly, resides with a qualifying child for more than half the year, and either lived apart from their spouse for the last six months or holds a separation instrument and is not a member of the same household by year end, is treated as not married. That exception has no counterpart for a childless claimant.

The investment income cliff. No credit at all if disqualified income exceeds $12,200 of disqualified income for taxable years beginning in 2026 — the IRC § 32(i)(1) figure of $10,000 as indexed; one dollar over and the whole credit is denied^TY2026 (IRC § 32(i)(1)). Disqualified income is taxable interest and dividends, tax-exempt interest, net rents and royalties not from a trade or business, capital gain net income, and net passive activity income (IRC § 32(i)(2)(A)–(E)). This is a cliff, not a phase-out: a single dollar over the ceiling denies the entire credit.

Identification. a social security number issued by the Social Security Administration on or before the return's due date, and not one issued solely to establish entitlement to a federally funded benefit — required for the taxpayer, the spouse and every qualifying child taken into account (IRC § 32(m))^TY2026 The taxpayer’s and spouse’s numbers are required by § 32(c)(1)(E) and each qualifying child’s name, age and number by § 32(c)(3)(D), with § 32(m) supplying what a number must be. A child without a qualifying number is simply not taken into account — the taxpayer may still claim the childless credit if they otherwise qualify.

Disallowance and recertification. A taxpayer whose claim was disallowed is barred for ten taxable years after a final determination that the claim was due to fraud and two taxable years after a final determination of reckless or intentional disregard of the rules (IRC § 32(k)(1)(B))^TY2026. Where the disallowance came through the deficiency procedures rather than a fraud or recklessness finding, no credit is allowed in a later year until the taxpayer provides whatever information the Secretary requires — in practice Form 8862 (IRC § 32(k)(2)).

Preparer due diligence. Reg. § 1.6695-2(b) imposes four requirements — complete and file Form 8867, compute the credit on the prescribed worksheet or a documented equivalent, meet the knowledge standard by making and contemporaneously documenting reasonable inquiries where the information appears incorrect, inconsistent or incomplete, and retain the records for three years^TY2026. The knowledge requirement is the substantive one: the preparer must not know or have reason to know that information used is incorrect, may not ignore the implications of what they are told, must make reasonable inquiries where a well-informed preparer would find the information incorrect, inconsistent or incomplete, and must contemporaneously document the inquiries and the answers (Reg. § 1.6695-2(b)(3)(i)). The penalty is $665 for each failure to meet the due diligence requirements, with no maximum, for a return or claim for refund filed in 2027 — the same penalty covers head of household status, the child tax credit, the American Opportunity credit and the earned income credit^TY2026 (IRC § 6695(g)).

Current figures

How it works in practice

Check the disqualifiers before computing anything. Disqualified income above the ceiling, a nonresident alien period, a § 911 claim, a married taxpayer not filing jointly and outside the separated spouse exception, a missing social security number, or an open disallowance period — any one of these ends the analysis.

Then count qualifying children. Relationship, abode in the United States for more than half the year, age, and the joint return rule. No support test. A child who is married is out unless the taxpayer can claim them.

Then read the table. Compare adjusted gross income and earned income and use the greater for the phase-out. A taxpayer whose adjusted gross income exceeds earned income — because of unemployment compensation, say — phases out on the larger figure.

Then decide the combat pay election if it is available, by computing the credit both ways. Including combat pay helps a taxpayer on the rising part of the curve and hurts one already past the phase-out threshold.

Then do the due diligence, and document it as you go. The regulation asks for contemporaneous records, and a file reconstructed after an examination notice does not meet it.

How this has changed

The section’s own text carries the mark of the 2021 legislation, and reading it without the dates is a trap. Section 32(n) sets out special rules for individuals without qualifying children that applied to taxable years beginning in 2021 alone, and it remains printed in the section. So does the unindexed base figure in § 32(i)(1), along with the base amounts in § 32(b), all of which are meaningless without the annual revenue procedure.

Three 2021 changes were made permanent and are current law, which is why they are easy to misattribute. The American Rescue Plan struck former § 32(c)(1)(F), which had denied the credit outright to an individual who had qualifying children but no valid social security number; the result is that such a taxpayer may now claim the childless credit. It added the § 32(d)(2)(B) separated spouse rule. And it raised the disqualified income base substantially, which is why an older ceiling in the low thousands appears in pre-2021 sources.

Nothing in Pub. L. 119-21 amended § 32. The 2026 changes on this topic are the ordinary inflation adjustments in Rev. Proc. 2025-32 § 3.06, and the § 6695 penalty amounts in § 3.54 of the same revenue procedure, which are stated for a return or claim for refund filed in 2027.

Exam focus

Expect definitional questions rather than computations, because the credit is read from tables. The recurring ones are: which tests apply to a qualifying child here but not for the child tax credit — the answer is that support applies there and not here; whether combat pay must be included — it is elective; what happens when investment income is one dollar over — the credit is denied entirely; and how long a disallowance lasts — ten years for fraud, two for reckless or intentional disregard.

Know the childless claimant’s three conditions, know that a married claimant needs a joint return unless the separated spouse exception applies, and know that an individual taxpayer identification number never supports this credit for anyone on the return.

For the preparer side, know the four due diligence requirements, that Form 8867 must be filed with the return rather than merely retained, that records are kept three years, and that the penalty applies per failure with no maximum.

Check yourself

1. A taxpayer with two qualifying children has earned income of $24,000, adjusted gross income of $29,500 including unemployment compensation, and $600 of tax-exempt interest. Which figure drives the phase-out, and does the interest matter?

Answer: Adjusted gross income of $29,500, because IRC § 32(a)(2)(B) uses the greater of adjusted gross income and earned income. The tax-exempt interest is disqualified income under § 32(i)(2)(B), but $600 is far below the ceiling, so it does not deny the credit.

2. A married taxpayer lived apart from their spouse from March onwards, has a qualifying child who lived with them for the whole year, and files separately. Is the credit available?

Answer: Yes. IRC § 32(d)(2)(B) treats the individual as not married where they do not file jointly, reside with a qualifying child for more than half the year, and do not share a principal place of abode with the spouse during the last six months of the year. A March separation satisfies the third element.

3. Why does releasing a dependency exemption to a noncustodial parent not move the earned income credit?

Answer: Because IRC § 32(c)(3)(A) applies § 152(c) determined without regard to § 152(e), the special rule for divorced parents. The child remains a qualifying child of the parent with whom they reside, so the earned income credit stays with the custodial parent even though the child tax credit moves.

4. A preparer computes an earned income credit and a child tax credit on the same return and fails to file Form 8867. How many penalties?

Answer: Two. Section 6695(g) imposes the penalty for each failure to meet the due diligence requirements with respect to each benefit listed in it, and both credits are listed. There is no maximum on the aggregate.

5. A taxpayer’s earned income credit was disallowed two years ago in a deficiency proceeding, with no finding of fraud or recklessness. What must they do to claim it now?

Answer: Provide the information the Secretary requires to demonstrate eligibility — Form 8862 — under IRC § 32(k)(2). No disallowance period applies, because § 32(k)(1) bars the credit only after a final determination of fraud or of reckless or intentional disregard of the rules.