Need to Know Tax › Deductions, credits, and gains
Deductions, credits, and gains
The earned income credit
The biggest refundable credit in the tax code, worth more than $8,000 to some working families, and the one the IRS watches most closely. It rises with earnings, levels off, then shrinks, and it always follows the child’s home.
The earned income tax credit was built for people who work and do not earn a lot. It is refundable: if the credit is bigger than the tax you owe, the IRS sends you the difference. A single parent with two children who owes no tax at all can still receive the full credit as a refund. It also has more rules than almost any other line on the return, which is why EITC refunds are held every February and why EITC returns are audited more often than most.
| Qualifying children | Maximum credit | Income where the credit reaches zero (approximate; single / joint) |
|---|---|---|
| None | $664 | $18,600 / $25,500 |
| One | $4,427 | about $49,000 / $56,000 (verify) |
| Two | $7,316 | about $56,000 / $63,000 (verify) |
| Three or more | $8,231 | $63,100 / $70,200 |
Investment income must be $12,200 or less. The exact lines come from the IRS tables in Publication 596; the ceilings here are approximate.
The shape of the credit
The credit is figured from earned income: wages, salary, tips and net self-employment income. Pensions, Social Security, unemployment and child support do not count. It is not a flat amount. From the first dollar earned it grows as a percentage of earnings (the phase-in), reaches the maximum in the table and holds there for a range of income (the plateau), then shrinks with every extra dollar until it is gone (the phase-out). The phase-out looks at the larger of earned income and adjusted gross income, so a pension or a spouse’s income can phase out a credit it did nothing to earn.
Worked example: one single parent, two children, four levels of earnings
| Earned income | Where on the curve | EITC (approximate) | Colorado match (25%) | What a $1,000 raise does to the credit |
|---|---|---|---|---|
| $9,000 | Phase-in (40 cents per dollar) | $3,600 | $900 | Raises it by $400 |
| $20,000 | Plateau | $7,316 | $1,829 | No change |
| $35,000 | Phase-out (about 21 cents per dollar) | about $5,300 | about $1,325 | Lowers it by about $210 |
| $56,000 | Past the end | $0 | $0 | — |
Phase-in and phase-out rates for two children (verify against the 2026 tables). On the phase-out side, a $1,000 raise loses about $210 of EITC and $53 of Colorado match on top of income and payroll tax, so the parent keeps roughly $560 of it. That is not a reason to refuse a raise; it is a reason not to be surprised by next year’s refund.
Who qualifies
Every one of these must be true. You must have earned income from a job or self-employment. Investment income, meaning interest, dividends, capital gains and rents, must be $12,200 or less; one large stock sale can wipe out the credit. You, your spouse if you file jointly, and every child claimed must have a valid Social Security number issued before the return’s due date; an ITIN does not work. A worker with no qualifying child must be at least 25 and under 65 and not someone else’s dependent. Married couples generally must file jointly, with an exception for a spouse who lived apart from the other for the last six months of the year.
A qualifying child must be related to you, meet the age test (under 19, under 24 if a full-time student, or any age if disabled), and have lived with you in the United States for more than half the year. The residency test is where most of the trouble is. A parent who pays child support but whose child lives with the other parent does not have a qualifying child for the EITC, even if a divorce decree or a signed Form 8332 lets that parent claim the child tax credit. The EITC always follows the home, and it cannot be traded by agreement.
Where it goes wrong
Claiming a child who did not live with you. The most common error. The question is not who supports the child; it is where the child slept more than half the year.
Two people claiming the same child. When separated parents, or a parent and a grandparent in the same house, both claim one child, the IRS applies tie-breaker rules and one return gets corrected. Both are delayed while it sorts out.
Self-employment income that is wrong. Because the credit rises with earnings on the phase-in side, there is a temptation to report self-employment income that was never earned, or to leave off expenses; on the phase-out side the temptation runs the other way. The IRS looks hard at Schedule C returns with EITC and no records. A notebook of what you were paid and what you spent is fine. “About $9,000, cash” is not.
The mid-February hold, and Colorado
By law the IRS holds the entire refund on any return claiming the EITC or the refundable part of the child tax credit until mid-February, no matter how early you file, to match W-2s against what employers reported. The hold applies to the whole refund, not just the credit portion. In practice most of these refunds arrive late in February or early in March with direct deposit; plan around that date rather than the day you filed. Two things make the wait longer: a name or Social Security number that does not match Social Security’s records, and a child claimed on more than one return.
Behind the scenes
Paid preparers are required by law to complete a due-diligence checklist, Form 8867, for every return that claims the EITC, and to keep the answers and the documents behind them. That is why a preparer asks who lived in the house, for how many months, and whether anyone else could claim the child, and why the answer is written down. The questions are not suspicion; a preparer who skips them is fined $600 per credit (verify). A preparer who never asks them is a preparer to avoid, because when the IRS writes, it writes to the taxpayer.
The Colorado side
Colorado has its own earned income credit, figured from the federal one and refundable. For 2025 it was 50% of the federal credit; for 2026 it is 25%, because the state’s revenue trigger did not fire. If you qualify for the federal EITC you qualify for Colorado’s, and the software carries it over. Colorado also allows the credit to some residents shut out of the federal one, including workers who file with an ITIN and some 18-to-24-year-olds without children (verify). From tax year 2028 the state removes the federal age cap for workers over 64.
What to bring your preparer
- Every W-2 and 1099-NEC, and for self-employment, a record of income and expenses for the year
- Social Security cards for you, your spouse and every child claimed
- For each child: date of birth, relationship, and the months the child lived with you, with something that shows the child’s address (school records, a lease, medical records)
- Whether anyone else lived in the home who could claim the child, and whether the child’s other parent lives elsewhere
- Interest, dividend and brokerage statements, for the $12,200 investment income test
- If you are married and lived apart: the date you separated
Questions people ask
I don’t owe any tax. Why would I file?
For the EITC. It is paid out as a refund whether or not you owe anything, but only if you file a return and claim it. Every year a share of the people who qualify leave it unclaimed because nobody told them to file.
My child’s other parent and I split custody evenly. Who gets the credit?
The parent the child lived with for more nights. If it is truly equal, the parent with the higher adjusted gross income. The EITC cannot be traded back and forth by agreement the way the child tax credit can.
I’m 23 with no children and I work full time. Do I qualify?
Not for the federal credit, which starts at 25 for workers without children. Colorado allows its credit to some 18-to-24-year-olds (verify); ask.
Can I claim the EITC on an old return I never filed?
Yes, if you file within three years of the original due date. Refunds older than that are forfeited.
Why does the IRS audit this credit so much?
Because it is refundable and eligibility depends on facts the IRS cannot see, like who lived where. Audits are usually letters asking for proof of residency: school records, a lease, medical records with the child’s address. Keep those.
The questions are the law, not suspicion
A preparer who asks who lived in the house, for how many months, and whether anyone else could claim the child is doing what Form 8867 requires. A preparer who never asks is one to avoid, because the letter that follows comes to you.