The Earned Income Tax Credit (EITC) is a federal tax credit for low- to moderate-income working individuals and couples, particularly those with children. The credit is designed to help boost the incomes of workers paid low wages and reduce poverty. The EITC is refundable, meaning that if the value of the credit exceeds the amount of federal income tax a low-paid worker owes, the worker receives the difference in the form of a refund.

To qualify for the EITC, you must have earned income from working for someone or from running or owning a business or farm, and meet certain income and eligibility requirements. The amount of the credit depends on a recipient’s income, marital status, and number of children. The credit begins with the first dollar of earned income and rises with earned income until it reaches a maximum level, then phases out at higher income levels.

The maximum EITC will be based on the number of qualifying children you have:

• No qualifying children: $600
• 1 qualifying child: $3,995
• 2 qualifying children: $6,604
• 3 or more qualifying children: $7,430

Investment income is handled less gracefully, as one more dollar of investment income can result in a sudden and complete loss of the credit. Investment income includes interest, dividends, capital gains, royalties, rental income, and passive activity income.

The EITC is one of the most effective social welfare programs in the United States, lifting millions of people above the poverty line. Many states offer their own version of the credit, so it is important to review the instructions for the state you are filing in.