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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.


Friday 7th of February 2020

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.


Thursday 6th of June 2019

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.


Tuesday 19th of March 2019

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.



Wednesday 20th of March 2019

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! :)


Wednesday 13th of February 2019

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?

Keith Taxguy

Friday 15th of February 2019

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


Friday 15th of February 2019

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


Tuesday 12th of February 2019

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.