TAX TIP No. 40
The earned income tax credit, or EITC, can be a great benefit for workers who don't make much money. 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 IRS.
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 Internal Revenue Service 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 estimated 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.On 2008 returns, the maximum credit can be as much as $4,824 for workers supporting two or more kids. A worker with one child can get up to $2,917 with the credit. And $438 is available to a childless eligible employee. The amount is adjusted for inflation each year.
To qualify for the credit, a taxpayer must earn money, but not too much.
A single filer's adjusted gross income must be less than $12,880 if he or she has no children, $33,995 with one child and $38,646 with two or more kids. Married couples filing jointly are allowed to earn $3,000 more in each category and still claim the credit.
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 2008 returns, if you made more than $2,950 in investment income, you cannot file for the earned income credit.
replacecontent-tcm:8-118650
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.
And if you have no children, you must meet three additional tests before you can claim it.
Tests for the earned income credit
- You must be at least 25 years old, but younger than 65 at the end of the tax year for which you are making the claim.
- You cannot be the dependent of another taxpayer.
- You must live in the U.S. for more than half of the tax year.