Taxes » Tax Credits » Earned Income Tax Credit Could Pay Off
The earned income tax credit, or EITC, can be a great benefit for workers who don't make much money or to those who did work but then lost a job. This tax break returns to qualified individuals a portion of the taxes they paid.
It even can produce a tax refund for eligible filers who had no tax liability. Most tax credits are nonrefundable, meaning they simply zero out a tax bill. For example, you owe $800 and have a $1,000 credit. That credit will erase your $800 bill, but you lose the extra $200.
But a refundable credit, which the EITC is, will allow you to get that extra $200 back as a refund from the Internal Revenue Service.
There is, however, a drawback to the credit. It is rather complicated, and because eligible taxpayers usually don't have much cash to spare, they generally cannot afford professional help in filing for it. The IRS has an online program, the Earned Income Tax Credit Assistant, to help these filers.
By answering some questions and providing basic income information, the online program will help you determine your correct filing status, whether your children meet the credit's requirements and will give you an estimate of the amount of credit you may receive.
So that you'll know what to expect when you go to the online program, here's a look at the earned income credit's basic guidelines and pitfalls.
Who qualifies?
Many people think the credit is available only to parents. It's not. But the amount the IRS will give back is greater for eligible low-wage taxpayers with children. The amount is adjusted for inflation each year.
Tax year 2011 maximum credit
- $5,751 with three or more qualifying children.
- $5,112 with two qualifying children.
- $3,094 with one qualifying child.
- $464 with no qualifying children.
To qualify for the credit, a taxpayer must earn money, but not too much.
Tax year 2011 earned income and adjusted gross income must be less than:
- $43,998 ($49,078 if married filing jointly) in households with three or more qualifying children.
- $40,964 ($46,044 if you're married and file jointly) with two qualifying children.
- $36,052 ($41,132 if you're married and file jointly) with one qualifying child.
- $13,660 ($18,740 if you're married and file jointly) with no qualifying children.
All wage or salary income, as well as any self-employment earnings, count toward the eligibility limits. Investment income also must be taken into account. If you collect too much of this unearned income, it could disqualify you. For 2011 returns, if you made more than $3,100 in investment income, you cannot file for the earned income credit.
Married couples who file separate returns are not eligible for the earned income credit. If you are married, but your spouse did not live in your home for the last six months of the year, you may be able to file as head of household and take the credit.