Gaming the Earned Income Credit

The best opportunities in the tax code are not found in the book. Today I am going to show you how to game the Earned Income Credit (EIC) legally in a way you have never heard before. I know most readers on this blog have an income in the six figures and higher. The example I illustrate today is geared toward families with an income of $100,000 or less. Even if your income is higher you want to stick around. What I show here exposes the way I think about taxes and how I use the tax code to save my clients massive quantities of money.

The EIC has a history of fraud. Because of this the IRS watches tax returns with the EIC closely for fraud. You guys are not at risk of IRS scrutiny because you are not going to commit fraud. Right? Good. The program I outline below does not require cheating to ramp up your available tax credits. No fake income or expenses are required. We will do this all above board for everyone to see. The IRS will bless your tax return for its accuracy.

The EIC is meant to help poor families, but the credit extends all the way to $50,597 for a married couple with two children in 2017. Our example below will use this family unit to illustrate the tax benefits. When we are done you will know how to collect the EIC even if your wage income is over $80,000, or even a bit higher!

Setting the Stage

It all comes down to spending and saving. People who save get wonderful financial gifts and spenders get a bill from the IRS. Regular readers know I recommend saving half your gross income. First you fill retirement accounts and Health Savings Accounts before plowing excess funds into non-qualified accounts.

The great thing about saving half your income is the IRS pays you so much back in credits and reduced taxes that it doesn’t really hit your cash flow 50%. A small amount of self control goes a long way in building a massive net worth.

Meet our married couple Snow and Snap Pea, the proud parents of two sons. Our young couple is in their 30s and the kids are in grade school. Snow has a good job working at the Delicious Café. Snap works part-time at Beautiful Music. Their tax return is simple and straightforward. They have no other income except the W-2 wages and take the standard deduction. I’m keeping the illustration simple so it is easier to follow. Other income and deductions will change the results, but the tax reducing strategy I use here will still apply.


As you can see from the W-2s, Snow has $53,000 in wages for 2016 and Snap had $19,000. Snow has health insurance from his employer and it is HSA qualified. Both Snow and Snap have a SIMPLE IRA retirement plan available at their jobs. (Once again I am keeping this simple. There are multiple retirement plans out there with the 401(k) the most popular. I chose the SIMPLE IRA because you can contribute the first $13,000 of earned income, no percentages like 401(k) and similar plans.)

On the 1040 it looks like this:


Their combined wages of $72,000 drop down to the bottom of the page because there is no other income or adjustments to claim.


The damages are totaled on page 2 of Form 1040. The standard deduction and personal exemptions are subtracted to arrive at the Taxable Income and Tax of $5,556. You will notice our couple gets a Child Tax Credit of $2,000. There are no additional Credits or Other Taxes so they have a 2016 tax of $3,556. They over withheld on their paychecks so they get a nice refund of $1,344. Their income was too high to qualify for the EIC or Saver’s Credit.

Snow and Snap Pea are happy with the results on their tax return until they discovered The Wealthy Accountant blog. They started to wonder if this crazy tax guy was on to something. They scheduled a consultation with the Wealthy Accountant and it went like this:

Keith discovered the HSA and SIMPLE IRA availability early in the phone interview. It took some smooth talking to get Snow and Snap onboard with the max-out of the SIMPLE and Health Savings Account. Of course they were a lot more confident when they saw how it affected their tax situation in real life.



Notice each W-2 has less reported income than before in Box 1. Box 1 is what goes on your tax return to calculate income taxes. Snap has $13,000 less in Box 1 than Boxes 3 and 5. Boxes 3 and 5 is the income subject to Social Security and Medicare taxes (FICA). The SIMPLE contributions reduced the income for income tax purposes, but FICA taxes still apply. Where it gets interesting is on Snow’s W-2. He also filled his Health Savings Account from his paycheck through work. This lowered his income subject to income, Social Security, and Medicare taxes. At the end of this post we will tally the total tax savings and amounts invested/saved. (See note in comments section. Snap’s original W-2 started with $19,000, but was $16,000 on the second W-2.)


Page one of the Wealthy Accountant approved tax return looks like it was hit by a truck! Our young couple started with a $72,000 income and now only report $36,250. Wow! $36,250 is plenty to live on comfortably, but Snow and Snap do not need to worry. The IRS wants to help these poor, poor people out. The IRS has a heart of gold for people who save their money intelligently. The IRS now thinks they are poor because they tucked a large chunk of their income into their back pocket rather than spending it.


Once again the standard deduction and personal exemptions are subtracted before tax is calculated. The Peas now have a tax of $748! The Saver’s Credit is non-refundable, but they can use $748 of the credit so their total tax is zero YeeHaa!


Paying zero tax is so last year. Major corporations have done better than that when they book billions in profits. Just ask General Electric. And Snow and Snap Pea will do the same. The bottom of page 2 on Form 1040 shows why this tax return is Wealthy Accountant approved.

The Saver’s Credit is non-refundable, but the Child Tax Credit is refundable and since it was not taken above, it increases the refund here by $2,000. See that $2,932? That is the Earned Income Credit. Nice, hey? That is why we started this post. The EIC is the goal here, but there is so much more that comes along with it. The refund was $1,344 before we had a talk with our young couple. Now they have a $9,832 refund! You might be tempted to subtract $1,344 from $9,832 to arrive at a tax savings of $8,488. And you would be wrong if you did.

Time for Some Math

Snow and Snap had to give something up for the tax benefits received. They reduced their available income as follows:

SIMPLE IRAs: $13,000 each

Health Savings Account: $6,750

So Snow and Snap had to deduct $13,000 + $13,000 + $6,750 from their paychecks. $32,750. That is a lot of money. Things must be tight around the house.

Well, maybe not as much as we think. Remember the tax return showed a tax advantage of $8,488 in the form of a bigger refund. But the Health Savings Account also reduced wages subject to FICA taxes of 7.65%. This adds another $516 (rounded down) in tax savings! The real tax benefits equal $8,488 + $516, for a total tax benefit of $9,004. I told you the IRS loves you. You just need to learn their language. They have plenty of money to give away. (See note in comments section below. There was a slight change to the final tax savings.)

The family cash flow is down, but not $32,750. When you add the tax benefits back into the family budget the Peas only saw their cash flow decline $23,746. But wait for it. Your net worth went up $32,750! In effect the IRS gave you $9,004 tax free! Now where you going to get a better deal than that?

Here we have a family earning a modest, but comfortable income and turning it into a wealth building powerhouse. We didn’t even include the company 3% match added to the SIMPLE contributions.

One final thought. Doing what I outlined here is so powerful because the IRS doesn’t get you on the back-end either. SIMPLE IRAs act the same as a traditional IRA. You are taxed when you withdraw the money. You will pay tax at ordinary rates on that future date. What you will never pay back is the credits. The Saver’s Credit and Earned Income Credit are yours to keep. There is no future payback date. Just tuck it into the First National Bank of Wallet.

Now aren’t you glad you stopped by today?

Note: I checked and rechecked my numbers, but I wrote this in the middle of the night while sitting on the floor and using a preliminary 2016 tax program which arrived at the office November 30th. If you see a math error let me know in the comments. I’ll get right on it. As an accountant I’ll be the first to admit I never make a mistake.

Keith Taxguy, EA

Keith started his tax practice in 1982 and went full-time in 1989. An enrolled agent (licensed tax professional) since 1992, Keith has focuses on helping businesses and individuals pay the least amount of tax allowed by law.


  1. Bill on December 2, 2016 at 5:58 pm

    I think there is a mistake or at least something not explained.

    The $19000 is reduced to $3000 by a $13000 IRA contribution. Wouldn’t that leave $6000?

    Perhaps you intend for health insurance premiums of $3000 to be a reduction.

    Didn’t look into it further than that and I assume the principle is still valuable.

    • Keith Schroeder on December 2, 2016 at 9:33 pm

      Thanks for pointing it out, Bill. I couldn’t get the preliminary program to print at first so I took photos of some and a printout of the others. I forgot my starting point. Snap should have $3,000 less on the first tax return without any SIMPLE contributions. The refund on that return should be $1,794 and the total tax benefit of maxing out the SIMPLEs and Health Savings Account is $8,554 ($9004-($1,794-1344)).

  2. jo on December 3, 2016 at 10:32 am

    Could you touch on the investment income limit?
    Here is useful example (for me): $50k W2 income, $20k in interest income, $25k in passive rental losses on schedule e’s.

    • Keith Schroeder on December 4, 2016 at 7:49 am

      Unfortunately you can’t net the interest income with the rental loss. Since your interest income is over $3,400 you are not allowed to claim the EIC. Sorry.

  3. James on December 3, 2016 at 7:01 pm

    I thought the Savers Credit was non refundable. When you were talking about the credits not being taxable, you said the Savers and EIC they get to keep, but I believe you meant the additional child tax credit and EIC. Correct me if I am wrong. Either way, this is powerful stuff! I am right at what they earn, but since I am the only worker, I can’t quite game the EIC.

    • Keith Schroeder on December 3, 2016 at 7:46 pm

      The Saver’s Credit is non-refundable, James. The credits in explained in this post are not included in income later. I actually meant all the credits. You keep the EIC, Child Tax Credit, Refundable Child Tax Credit, and Saver’s Credit. Refundable or not does not change the fact that you never pay them back. Think of it this way: Suppose you are exactly like the couple in the post. You get all those credits. The very next year you say “Screw it” and take all the money out of the SIMPLEs and Health Savings Account and pay the tax and penalty. You still keep the credits received when you took the deductions the prior year! Hope I am clear on this. I know taxes get complicated fast.

  4. crack_cocaine on December 3, 2016 at 9:11 pm

    Hey Keith, I’ve read your whole blog and I’m really enjoying all these advanced tax reduction techniques you’ve been talking about in your recent entries. Have you thought about doing a post on how you can basically get free insurance through Obamacare if you’re self-employed and max out your solo 401k?

  5. Mustard Seed Money on December 4, 2016 at 6:05 pm

    I love reading the ins and outs of the tax code especially when they are advantageous to me 🙂 Thanks for sharing, I will definitely investigate to see if this is something that will be applicable to me. Thanks for sharing!!!

  6. Jonah on March 31, 2017 at 1:14 pm

    Hey Keith,

    I just wanted to say thank you for this. I discovered your blog a little bit too late (November of 2016) to max out my 401k for 2016, but definitely using all means available to me in 2017. Your blog personally, has already saved me thousands of dollars in taxes, and helped set me up for future years of blissful tax free living. It is amazing. I have almost read all of your posts, now.

    SO thank you, and please keep writing!

  7. Frugal Professor on September 1, 2017 at 4:02 pm

    To those interested in reading my take on EITC hacking as well, you can find my thought here:

    ETIC hacking earned me $8k last year, through maxing out retirement contributions to 403b&457 with my 5 kids.

  8. J. H. on November 17, 2017 at 2:28 pm

    The IRS, unfortunately, does not seem to be deducting SIMPLE, or solo 401k (which is what I have) from your income for the EITC. There is no space for it in their calculator. I have also gotten a significantly lower tax refund than expected- and the 7000 or so they didn’t take off my AGI with the solo 401k explains why.

    In your opinion, is this an oversight we BOTH made, if I’m understanding you right, or did the IRS screw up and accidentally leave it out of their calculations?

  9. J.H. on November 17, 2017 at 2:54 pm

    I withdraw my previous comment- that does not seem to be the problem.

    It is interesting to me that the IRS’s 2016 estimation app does, though, neglect to have space to take off sIMPLE and solo 401k’s.

    • Keith Schroeder on November 17, 2017 at 6:27 pm

      J.H., I’m going to keep your comments up so others who experience the same problem can see the issue. If you feel embarrassed about it let me know. I’ll see if I can edit your name and email out. If not, I’ll delete.

  10. Caitie on December 3, 2017 at 7:58 am

    Will a traditional IRA lower earned income the same way a SEP IRA does to help increase the EIC? My husband is not self-employed, but has no retirement plan at work.

  11. Stephanie on September 4, 2018 at 12:10 pm

    Hi Keith,

    I very much so enjoy your blog, and your personal philosophy regarding life and money. I have a crazy question for you about the EITC. My income comes from three sources. Personal income from social security disability and alimony, and then rental property. Because alimony is considered earned income (though by my ex) I am able to fund either my tIRA or Roth every year to the tune of $6500. Is there any chance I’d be eligible for the EITC, as well?

    Thank you, SB

    • Keith Taxguy on September 4, 2018 at 12:31 pm

      It’s possible, but unlikely, Stephanie. You are correct in saying alimony is considered earned income and can be used to fund IRAs. Since you get Social Security you are probably at least 62; EITC stops the year you turn 65. Next, you have unearned income with your investment property. If investment income exceeds $3,500 (in 2018) you also do not qualify for EITC. Finally, the credit is small and phases out at a low income level if you have no qualifying children. Since you didn’t mention children I’ll assume no children.

      In short, you could qualify for EITC and fund an IRA, but the limitations reduced the chances significantly.

  12. Stephanie on September 4, 2018 at 1:03 pm

    Darn it. Yes, my investment and net rental income far exceeds $3500. I just got excited there for a second. Well, it was a thought.

    Thank you for your very quick answer.

  13. Jwald on September 5, 2018 at 10:15 pm

    Hey Keith,

    First, I just want to say that I am a huge fan of your blog! I am a long time reader but never have commented. I’m sure I have a million things I could pick your brain over but I just wanted to start with a simple one. I had heard that IRA (traditional) contributions do not count as to factoring into the EITC. Is that true?
    I ask because I’m trying to maximize my credit for this year (as I just had my first child). I already have around $27,000 in taxable income for the year. The rest is going to further 401(k) contributions the rest of the year. As you can see I am in the phaseout range already so from what I’ve back of the napkin calculated, anymore realized income for this year I will effectively pay 15% tax for ever $50 due to the way the phaseout works.
    Funny thing I figured out as well is even by deferring all additional compensation this year I am still getting my realized income raised due to SS and Medicare tax. So for every $50 I pay in SS/Med I also lose $15 on the EITC! Dang the feds! Lol.
    I was also wondering if you thought it was worth it if the IRA deduction(s) (married file jointly) didn’t count would you still recommend contributing to save 9% state tax (I live in Oregon)? Also, I only have $10,000 in cash and about $13,000 in non-qualified account.
    The reason I wasn’t going to contribute to an IRA this year was that it wouldn’t lower my fed tax bill as I will be getting a check from Uncle Sam this year. The small amount of tax I’ll owe after standard deduction will be handled by the child tax credit and then $1,300 is refundable which will add to EITC.

    Thanks for all of your writings skills! Keep it up!

    • Keith Taxguy on September 11, 2018 at 2:37 pm

      Since your income is low already, Jwald, why not contribute to a Roth IRA. 401(k) contributions from your paycheck are netted, lowering your earned income. This can help with EIC. The same doesn’t apply to tIRAs.

      I don’t like contributions to tIRAs when there is no current tax benefit. The only option is a Roth where the profits are tax-free. Yes, your state taxes are high, but it’s not enough (in my opinion) to warrant atIRA contribution under the scenario you describe. Another alternative is to up the 401(k) to max out the $18,500 annual limit if you wish to game the EIC.

  14. […] people need not complain. The Earned Income Credit was designed to compensate low income workers with a kickback of their FICA taxes. In my tax plan […]

  15. Better than Raising the Minimum Wage on January 27, 2019 at 12:25 pm

    […] can game the EITC legally too. Cheating is rampant and the IRS and Congress know it. The credit starts small and […]

  16. Mar on February 12, 2019 at 10:38 pm

    I have a question regarding Solo 401k to which I contributed from self employed 1099-misc income. Shouldn’t contributions lower the earned income? I am trying to do my taxes on turbo tax but increasing contributions to the solo 401k do not have any effect on the EITC according to the software.

  17. Ev on February 13, 2019 at 9:59 pm

    A contribution to a 401k at work reduces the income in box 1 of the W2 and thus the earned income. I thought that a contribution to a solo 401k from a 1099-misc as an independent contractor also would decrease the earned income. Is that correct or is there a crucial difference in how a regular 401k is treated vs. a solo 401k?

    • Tripplefiguy on February 15, 2019 at 1:40 am

      I am wondering the same thing. Very important to know and I haven’t been able to find info on it anywhere regarding the solo 401(k), SEP IRA or SIMPLE IRA contributions

      • Mar on February 15, 2019 at 12:09 pm

        Tripplefiguy, if you find the answer please let me know!

    • Keith Taxguy on February 15, 2019 at 3:06 pm

      It gets deducted under adjustments to arrive at AGI (same line as a SEP contribution), so it reduces AGI, not earned income.

      • Ev on February 15, 2019 at 5:20 pm

        Ok, thank you. That was the conclusion I had come to but didn’t want to accept. A 401k at work is far better than a solo401k, unfortunately for those of us working as independent contractors.

      • Tripplefiguy on February 15, 2019 at 7:12 pm

        So it’s basically a loop hole that highly favors working for an employer and sheltering $19,000 in earned income in a 401(k) thus reducing earned income and disadvantaging a family who is self employed who cannot reduce their earned income through self employment retirement plans. For lower income families, not being able to shelter $19,000 would almost push them to lose almost all of the EITC due to the phase out process. Doesn’t really seem fair at all. Is there any way around this?

        • Keith Taxguy on February 15, 2019 at 9:55 pm

          You can easily become an employee of your business to get the same deal. Just organize as an LLC and elect S corp status. It’s not the retirement plans fault; it’s the sole prop status causing all the problems, which it usually does.

          • Tripplefiguy on February 15, 2019 at 11:11 pm

            Keith, thank you for taking the time to help answer our questions as I know it’s tax season and you’re most likely extremely busy. With regards to your comment, how would you say that solution works if said company was either very small (micro business) or just getting started and not making a lot of money if any the first year or two? I know you’ve mentioned in other posts that it really only makes sense to elect S Corp status after your business is bringing in $50,000 plus a year.

  18. Christopher on March 19, 2019 at 9:47 pm

    I love this article, and it has given me a lot to think about. I look at EIC every year because we always fall close to the upper limit of eligibility, but never can quite reach with sufficient 401K or HSA contributions.

    That being said, assuming one is eligible for the EIC based on earned income, would a Roth IRA distribution of only contributions have any impact on eligibility?

    My (possibly crazy) idea is whether I should max my 401K and HSA contributions for 2019 to reduce my earned income, and cover my cash flow shortfall (due to my reduced net pay check) with a distribution of prior Roth IRA contributions.


    • Tripplefiguy on March 20, 2019 at 1:04 pm

      Christopher, it’s always a good idea to max your tax advantaged accounts out.

      Roth distributions of only contributions have no impact on AGI or earned income since it’s money that’s already been taxed. Don’t forget though, that once you take money from your Roth, you can’t put it back later. The money has lost all of its future ability to be invested and provide tax free returns.

      Depending on how many kids you have, your phase out range for the EITC would be roughly 16-21%. Add your effective federal tax rate as well as state tax and that is your immediate return on every dollar you shelter to lower your earned income. With dollars going into the HSA you can add on another 7.65% return.

      As you can see there is potentially a huge up front return on your money by utilizing your tax sheltered accounts and the EITC. But should you raid your Roth account in order to utilize this trick? That’s up to you but for me, I would look into making some sacrifices and cut down my expenses. That way I could get the best of both worlds, i.e. maxing EITC and leaving my Roth alone to keep growing tax free.

      Think of it this way, sit down with your budget and weigh the opportunity cost of what you choose to spend on. Is that dinner out worth an extra (potentially) 50% mark up? Is X really worth 25-50% more in costs? Is it worth it to work every other day for free just so you can have the convenience of X product or service?

      Only you can answer that. Good luck! 🙂

  19. gli on June 6, 2019 at 9:10 am

    Thank you for sharing your knowledge wealthy accountant! Quick question… I am inheriting my deceased great aunt’s IRA of roughly $13,300 this year. I was planning to maximize the EITC of $5,828 in 2019 fully by utilizing my 403b and 457 this year to reduce income to the standard deduction amt for MFJ. Questions if you have a moment (I reviewed elsewhere but wanted to see your thoughts).

    1. Will the RMDs or lump sum distribution count towards the $3,599 max interest income limit to receive for eitc? If so then the EITC is lost.

    2. Everything I see says a required ira rmd’s or lump sum distributions count as normal income. So as we pay 0% in federal taxes currently as long as I do not exceed the max AGI for MFJ with two children EITC threshold – I just need to fit in the inheritance under the AGI/earned income for EITC 2019 and Evaluate how much to take out each year right?

    3. Current tax plan was based (including non-spousal inherited IRA of $13,300) around my details:
    $47,250 pre tax income
    Plus $3,599 interest income.
    Plus $13,301 inherited IRA distribution
    = $64,151 total income from all sources.

    Minus $2,160 pre-tax health care contributions.
    Minus $19,000 457b contributions
    Minus $19,000 403b contributions

    = $23,991 AGI (Correct?) for the purposes for EITC calculations.

    ($24,394 appears to be the max AGI/ earned income allowed for max EITC for 2018)
    Std MFJ deduction of $24,400. No state income tax and no federal taxes.

    Much obliged for any wisdom or thoughts that you have on the above.

  20. David on February 7, 2020 at 2:13 pm

    You can still make self-contributions to your HSA until April 15th for the previous year. I was thinking of doing this to increase my earned income credit, as we are on the downslope of the phase-in and phase-out. So I thought it would reduce my income and thus increase my earned income credit. I see that if I had reduced my income on Box 1 of my W-2 with increased contributions to the HSA through my employer then it would increase my EIC and therefore increase my refund, however, if I make self-contributions to my HSA in February and March for last year then it does not increase my EIC or my refund. Is this the way it is supposed to work? I just can’t see why EIC would care if I made the HSA contribution through my employer or with self-contribution.

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