EITC Investment Income Limit — The $11,600 Cap Explained

One stock sale or a good year of dividends can wipe out your entire EITC. The investment income limit for 2026 is $11,600 — go over by even $1, and you lose the credit completely. There's no gradual phase-out here. It's a cliff.

Check whether you're under the limit with the EITC Calculator.

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What Counts as Investment Income

Two surprises on this list:

Tax-exempt interest counts. Even though muni bond interest isn't taxed, it still counts toward the EITC investment income test. A $12,000 muni bond portfolio generating tax-free interest would disqualify you.

Retirement distributions don't count. A $50,000 IRA withdrawal doesn't count as investment income for EITC purposes — it's treated differently from dividends and capital gains.

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It's a Cliff, Not a Phase-Out

This is the critical point. Unlike income phase-outs that gradually reduce the credit, the investment income rule is binary:

A worker with 3 children and $35,000 in earned income could be entitled to ~$5,500 in EITC. If their investment income is $11,601, they get zero. That $1 in extra investment income costs them $5,500.

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Real Scenarios

Scenario 1 — Accidental Capital Gains

Maria earns $28,000 as a teacher's aide with 2 children. She sells some inherited stock for a $13,000 gain. Her investment income now exceeds $11,600. She loses her entire EITC — approximately $5,800.

What she could have done: Sold only enough stock to keep gains under $11,600, then sold the rest in January of the following year.

Scenario 2 — Savings Account Interest + Dividends

James earns $20,000 from part-time work. He has $200,000 in a high-yield savings account earning 5% ($10,000 interest) and a stock portfolio paying $2,000 in dividends. Total investment income: $12,000.

He's $400 over the limit, costing him his full EITC ($4,213 with 1 child).

Scenario 3 — Rental Property

Sarah earns $25,000 as a home health aide and owns a rental property generating $15,000 in net rental income. Even though she works hard managing the property, rental income counts as investment income for EITC purposes. She's disqualified.

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Strategies to Stay Under $11,600

Time your capital gains. If you need to sell investments, calculate whether the gains will push you over. Consider splitting sales across two tax years.

Offset gains with losses. Capital losses reduce your net capital gains. If you have losing positions, selling them in the same year as winners can keep net gains under the limit. This is called tax-loss harvesting.

Choose growth stocks over dividend stocks. Growth stocks that don't pay dividends don't generate investment income until you sell. Dividend-heavy portfolios generate income annually whether you want it or not.

Consider tax-advantaged accounts. Interest earned inside a 401(k), IRA, or Roth IRA doesn't count as investment income for EITC. Moving savings from a taxable high-yield account into an IRA (if eligible) could eliminate the investment income problem.

Watch your savings account interest. With HYSA rates at 4-5%, even a moderate emergency fund can generate meaningful interest. A $250,000 savings account at 5% produces $12,500 — over the limit.

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Capital Gains Netting

The EITC uses net capital gains, not gross. This helps:

Even though Stock A produced $15,000 in gains, the net after losses is $10,000 — under the $11,600 limit.

But capital losses can only offset capital gains (plus up to $3,000 of ordinary income). You can't use a $20,000 capital loss to eliminate $15,000 in dividend income for EITC purposes.

Use the Federal Tax Calculator to model your complete tax situation before making year-end investment decisions.