What Is Earned Income? IRS Rules, 2026 EITC Limits, and Cap

For the Earned Income Tax Credit, earned income is a narrow figure: taxable pay you received for working, plus your net earnings from self-employment. That is what the IRS uses under 26 U.S.C. § 32 to decide whether you qualify and how large your credit will be, and it deliberately leaves out investment returns, pensions, Social Security, and most government transfers.¹ Because the definition is narrower than “income” in everyday use, plenty of money that shows up on your tax return does not count here.

The Statutory Definition

Under 26 U.S.C. § 32(c)(2), earned income has two components and only two: taxable employee compensation (wages, salaries, tips, and similar pay) and net earnings from self-employment.¹ Congress built the credit to reward work, so the calculation focuses on what you were paid for your labor during the year. Passive income and retirement benefits do not reflect current work, so they sit outside the definition even when they are fully taxable elsewhere on your return.

You will sometimes see people write “modified earned income” or “MET income” when discussing the EITC. Neither is an IRS term. The phrase is casual shorthand for this narrower version of income, which modifies what most people think of when they hear “earned.”

Income That Counts

Start with Box 1 of your W-2. That is taxable wages, salaries, and tips from an employer, and it is the starting point for most EITC filers.² Commissions and bonuses live inside that number. If you have more than one W-2, add the Box 1 amounts together.³

Self-employment income counts, but only the net figure after allowable business expenses. You calculate net self-employment earnings on Schedule SE and add that amount to your wage total.² If your net self-employment earnings are $400 or more, you owe self-employment tax, and skipping Schedule SE can reduce your credit.

Three less obvious inclusions round out the definition:

Statutory employee income. If Box 13 of your W-2 has the “Statutory employee” box checked, you report your gross income on Schedule C, and that amount counts as earned income.²
Taxable strike and lockout benefits. Union-paid benefits during a strike, if taxable, count as earned income and are reported on Form 1040, line 1h.²
Disability retirement pay received before minimum retirement age. Taxable payments from your employer’s disability retirement plan count as earned income until you reach the earliest age at which you could have received a regular pension. After that, the same payments turn into pension income and drop out.⁴

Excess elective deferrals to a retirement plan above the annual limit may also need to be added back on Form 1040, line 1h.⁵ This is uncommon and tends to hit people who participate in multiple employer plans.

Income That Does Not Count

Several common income types are taxable on your return but do not belong in your earned income total for the EITC:⁶

Interest, dividends, and capital gains.
Pensions and annuities. Disability retirement payments received after minimum retirement age fall in this category too.
Social Security and railroad retirement benefits, whether or not any portion is taxable.
Unemployment compensation, even though it is taxable.
Child support and alimony.
Workers’ compensation and veterans’ benefits.
Welfare benefits and nontaxable foster care payments.

One exclusion catches people off guard: pay earned while incarcerated does not count as earned income for the EITC, even if it was taxable.¹

Nontaxable Combat Pay Is Optional

Nontaxable combat pay is excluded from earned income by default, but service members can elect to include it. Including it may raise the EITC or may shrink it by pushing you into the phase-out range, so the calculation is worth running both ways. The election is all or nothing: you include all of your nontaxable combat pay or none of it. If both spouses received combat pay, each makes the choice independently.⁷

Foreign Earned Income Exclusion Disqualifies You

If you file Form 2555 to claim the foreign earned income exclusion, you cannot claim the EITC that year. The statute is direct: anyone who claims the benefits of section 911 is not an eligible individual.¹ To claim the EITC while living abroad, you would have to forgo the foreign earned income exclusion entirely. That trade rarely favors the EITC, but it is worth calculating if your foreign earnings are modest.

How to Calculate Your Earned Income

The math is simpler than the terminology. Add up your W-2 Box 1 amounts. Add your net self-employment earnings from Schedule SE. Add any statutory employee income, taxable strike benefits, and disability retirement pay received before minimum retirement age. Then check the excluded list and back out anything that slipped in. What you have left is your earned income for EITC purposes.

The EITC then compares two numbers: your earned income and your adjusted gross income. The credit is calculated using whichever produces the smaller result within the phase-out formula, so both figures matter, and both have to fall within the annual limits.

2026 Income Limits and Credit Amounts

The IRS adjusts the EITC thresholds each year for inflation. For the 2026 tax year, the maximum credits and the income ceilings at which the credit phases out completely are as follows.⁸

Married filing jointly:

No qualifying children: maximum credit $664; phased out at $26,820.
One qualifying child: maximum credit $4,427; phased out at $58,863.
Two qualifying children: maximum credit $7,316; phased out at $65,899.
Three or more qualifying children: maximum credit $8,231; phased out at $70,244.

All other filing statuses:

No qualifying children: maximum credit $664; phased out at $19,540.
One qualifying child: maximum credit $4,427; phased out at $51,593.
Two qualifying children: maximum credit $7,316; phased out at $58,629.
Three or more qualifying children: maximum credit $8,231; phased out at $62,974.

The Investment Income Cap

Investment income sits outside the earned income calculation, but it can still disqualify you. For 2026, if your combined interest, dividends, capital gains, and other investment income exceeds $12,200, you cannot claim the EITC at all, regardless of how low your earned income is.⁸ Check that number before you spend time working through the rest of the calculation.

1
Office of the Law Revision Counsel. 26 USC 32 – Earned Income
2
Internal Revenue Service. Publication 596 (2025), Earned Income Credit (EIC) – Section: Earned Income
3
Internal Revenue Service. Instructions for Form 1040 – Section: Line 1a Total Amount From Forms W-2 Box 1
4
Internal Revenue Service. Publication 596 (2025), Earned Income Credit (EIC) – Section: Income That Is Not Earned Income
5
Internal Revenue Service. Instructions for Form 1040 – Section: Line 1h Other Earned Income
6
Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables
7
Internal Revenue Service. Military and Clergy Rules for the Earned Income Tax Credit
8
Internal Revenue Service. Revenue Procedure 2025-32