How to Calculate the Earned Income Tax Credit
The earned income tax credit is worked out in three ranges: a phase-in rate times earnings, a flat maximum across the plateau, then the maximum cut by a phase-out rate.
The EITC formula
Calculator
Enter the phase-in rate, ceiling, plateau end and phase-out rate to get the credit at any level of earnings.
Cents of credit added per dollar earned, until the ceiling is reached.
The credit is at its maximum from here on, until the plateau ends.
End of the flat range. Above it every extra dollar cuts the credit.
Cents of credit lost per dollar earned above the plateau.
Wage or self-employment income. The credit is a share of this, so zero earnings means no credit.
This household's credit works out to $2,880, paid out in full because the credit is refundable.
- Range you are in
- Phase-out
- Maximum credit
- $4,800
- Earnings where the credit hits zero
- $48,000
- Change in credit per extra dollar earned
- −$0.16
- Credit as a share of earnings
- 9.6%
Earnings are past the plateau, so each extra dollar shaves the phase-out rate off the credit.
The phase-in rate applied to the ceiling gives a maximum of $4,800, which every household on the plateau receives.
The credit runs out at $48,000 of earnings, which is the plateau end plus the maximum divided by the phase-out rate.
At this level of earnings the next dollar moves the credit by −$0.16, on top of whatever tax the household pays.
The credit adds 9.6% on top of what this household earned.
How to calculate EITC, step by step
- 1Find which range the earnings fall in. Below the phase-in ceiling the credit is still growing, between the ceiling and the end of the plateau it sits at its maximum, and above that it is shrinking.
- 2Work out the maximum credit. Maximum = phase-in rate × the earnings level where the phase-in stops. Every household on the plateau receives exactly that amount.
- 3Apply the rule for that range. In the phase-in range multiply the rate by earnings. On the plateau take the maximum. In the phase-out range subtract the phase-out rate times earnings above the plateau end.
- 4Find where the credit hits zero. Zero point = plateau end + maximum ÷ phase-out rate. Past that income the household receives nothing, and the credit never falls below zero.
Worked example: EITC
Use an illustrative schedule: the credit equals 40% of earnings up to $12,000, holds at its maximum of 0.40 × $12,000 = $4,800 until earnings reach $18,000, then falls by 16 cents per extra dollar. A worker earning $30,000 sits in the phase-out range, so the reduction is 0.16 × (30,000 − 18,000) = 0.16 × $12,000 = $1,920 and the credit is 4,800 − 1,920 = $2,880, which is 9.6% of earnings. The credit reaches zero at 18,000 + (4,800 ÷ 0.16) = $48,000. Real schedules are set by statute and vary with the number of children, so use the figures your question gives.
EITC questions
Does earning more always shrink the credit?
No. In the phase-in range every extra dollar earned raises the credit, which is why economists describe that stretch as a wage subsidy. Only past the plateau does more income start to reduce it.
What does refundable mean for this credit?
A refundable credit pays out the unused part as cash even when the household owes no income tax. A nonrefundable credit can only take a tax bill down to zero and no further.
Can a household with no earnings claim it?
No. The credit is calculated as a share of earned income, so a household with no wage or self-employment income receives nothing. That earnings requirement is what separates it from an unconditional cash transfer.
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