Low- and Moderate-Income Credits: EITC and CTC

High earners are phased out of both credits. They still matter to you twice: for a child or relative starting a career, and for the low-wage employees on your own payroll.

Earned Income Tax Credit (EITC). Governed by IRC §32, the EITC is a refundable credit targeting low- to moderate-income earners. The credit operates on a sliding scale across three phases: a phase-in where the credit grows with earned income, a flat plateau at maximum credit, and a phase-out as income rises.

Filing status restrictions apply, and the rule most references still print is out of date. Married couples generally must file jointly, and the older route around that was IRC §7703(b): file as Head of Household, pay over half of home maintenance costs, have a spouse absent for the last six months of the year, and maintain the primary home of a qualifying child. Since 2021 there is a second and easier route. IRC §32(d)(2), “Special rules for separated spouses” lets a married taxpayer claim the credit on a married filing separately return — no Head of Household status required — if a qualifying child lives with them for more than half the year and they either lived apart from the spouse for the last six months or hold a decree or separation instrument and did not share a household by year-end. A separated parent who was told they had to choose between filing jointly with an estranged spouse and forfeiting the credit was told wrong.

The phase-out is measured against AGI or earned income, whichever is greater — a detail that matters for a filer with both wages and investment income. The phase-out begins well below these ceilings: $23,890 for any filer with children ($31,160 joint), and $10,860 ($18,140 joint) with none.

EITC claimants must have investment income below $12,200 (for 2026), possess valid Social Security numbers for all individuals claimed, and cannot claim the foreign earned income exclusion on Form 2555, “Foreign Earned Income”.

Child Tax Credit (CTC). Under IRC §24, as amended by the OBBBA, taxpayers can claim a credit of up to $2,200 per qualifying child under age 17. The credit phases out at a rate of $50 per $1,000 of income exceeding $200,000 for single filers or $400,000 for married couples filing jointly.

Up to $1,700 of the credit is refundable as the Additional Child Tax Credit (ACTC) for taxpayers with earned income exceeding $2,500, calculated at 15% of earned income above that threshold.

Work an example end to end. A married couple filing jointly with two qualifying children and $50,000 of earned income in 2026 is entitled to $2\times \$2,200=\$4,400$ of credit. Start with the tax the credit has to work against:

The nonrefundable portion of the credit wipes out that $1,780 exactly, leaving $2,620 of unused credit to be tested under the ACTC rules. Their earned income clears the $2,500 floor, so the refundable ceiling is the lesser of two figures:

The $3,400 per-child cap binds, and $3,400 exceeds the $2,620 still outstanding — so the couple receives the entire remaining $2,620 as a refund and pays no federal income tax at all. Note which constraint actually bound: not the earned-income formula, which was generous here, but the $1,700 per-child refundable cap. At lower incomes the formula binds instead, which is why the credit is worth less to the families with the least earnings.

Under the PATH Act of 2015, codified at IRC §6402(m), the IRS is statutorily required to hold refunds for returns claiming the EITC or ACTC — the entire refund, not just the credit portion — until February 15 to verify income and prevent fraud.