Earned income tax credit could pay off, but expect delays when you file in 2017

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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 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 IRS has an online program, the Earned Income Tax Credit Assistant, to help these filers.

Expect EITC delays

And starting with the 2017 tax-filing season, the IRS won't issue any EITC-related refunds until mid-February.

The Protecting Americans From Tax Hikes (PATH) Act, which became law in December 2015, included a provision mandating the delay for refunds connected to returns on which the EITC or the additional child tax credit, or ACTC, are claimed.

Under the law, the IRS must hold the entire refund, even the portion not directly associated with the EITC or ACTC, until at least Feb. 15. The extra time was added to give the IRS more time to confirm that the refundable tax credit claims are correct. It also should help ensure that the claims aren't being made by identity thieves filing fraudulent returns.

Who qualifies for the EITC?

  • You must have earned income from work, your business or a farm.
  • Your adjusted gross income cannot exceed certain limits.
  • If you're married, you must file a joint return.
  • If you have children, they must meet all qualifying child rules.
  • Unearned income cannot exceed $3,400 in 2016.

Who qualifies for the EITC?

By answering some questions and providing 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.

Here's a look at the earned income credit's basic guidelines and pitfalls so you'll know what to expect when you go to the online program.

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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.

Maximum Earned Income Tax Credit amounts
Filing status2015 tax year2016 tax year
No qualifying children$503$506
1 qualifying child$3,359$3,373
2 qualifying children$5,548$5,572
3 or more qualifying children$6,242$6,269

To qualify for the credit, a taxpayer must earn money, but not too much.

Earned income and AGI limits by filing status for tax years 2015 and 2016
Number of qualifying children claimedSingle or head of householdMarried, filing jointly
3 or more$47,747$47,955$53,267$53,505

All wage or salary income, as well as any self-employment earnings, counts 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 2016 returns, if you made more than $3,400 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 6 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 4 additional tests before you can claim it.

Tests for childless EITC claimants

  • 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. If you're married, at least 1 spouse must meet the age requirement.
  • You cannot be the dependent of another taxpayer.
  • You cannot be the child that another taxpayer could use to qualify for the credit.
  • You must live in the U.S. for more than half of the tax year.

Requirements children must meet

All taxpayers claiming credits based on the children they are raising must take into account each child's age, the child's relationship to the taxpayer, where the child lived during the tax year and the child's tax-filing circumstances.

In most cases, the child must be younger than 19 at the end of the tax year in which the EITC is claimed. However, if the child is a full-time student, he or she can be as old as 23 and be claimed for the credit. Also, a permanently disabled child, regardless of age, can be claimed in connection with the earned income credit.

The relationship test is met if the child is your son or daughter (either by birth or adopted), stepchild or grandchild. Your brother, sister, stepbrother or stepsister (or the child or grandchild of these relatives) may also be considered for credit purposes.

A foster-child relationship may qualify for the credit as long as the child was placed with you by an authorized placement agency. This includes a state or local government agency or court, as well as a tax-exempt organization licensed by a state.

As for residency, the IRS generally demands that the child live with the taxpayer in the United States for more than half of the year.

Finally, if the child is married and files a joint return, then that child no longer qualifies the parent for the EITC.

Custody complications

Claiming the earned income credit can be especially confusing for people sorting through child custody issues.

When custody is split, only the parent who physically housed the child for more than 6 months can claim the credit. Sometimes, however, a child might be claimed by either parent.

This would be the case if you and your spouse lived together with your daughter until July 1 and then you separated. You shared custody of your daughter equally until your divorce became final in December. Since the girl lived with both of you for more than half the year and neither parent exceeds the credit's earning limits, you must decide who will claim the larger credit amount that is available when a child is involved.

If you and your spouse cannot agree, and each of you files naming your daughter in your credit claim, the IRS invokes tiebreaker rules to determine which taxpayer gets the tax break.

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Tiebreaking guidelines

First, the agency looks at whether only one person is the child's parent. This would be the case, for example, if one credit claimant is a stepparent. The parent would get the credit.

If neither person is the child's parent, the IRS would then give the credit to the filer with the highest eligible adjusted gross income, or AGI.

Finally, if both filers are parents of the child, the parent with whom the child lived the longest during the tax year would be given the credit. If the child lived with both separated parents for an identical amount of time, the credit would go to the parent with the highest AGI.

If several children are involved in a family situation where 2 taxpayers may claim them, the adults can decide to share the children for credit purposes. For example, you can use one child to claim the earned income credit and your spouse can use the other children. Again, if a sharing agreement cannot be reached, the tiebreaker rules would come into play.

Filing specifics

The earned income credit can be claimed on any individual tax return: the 1040EZ, 1040A and 1040. Each form's instruction booklet devotes several pages and accompanying worksheets to the credit.

In addition to the online assistance program, you also can find information and filing examples in IRS Publication 596, Earned Income Credit. Taxpayers with specific questions about or problems with filing for the credit can call the IRS at (800) 829-1040.

Military personnel also need to pay attention to special provisions that could require them to compute the credit 2 ways. Normally, combat pay is not taxable, but servicemen and servicewomen who received this income now can choose to count it if it will help in their EITC claim.

Don't forget your state

If you qualify for the EITC on your federal tax return, you also may be eligible for a similar credit from your state. Twenty-five states and the District of Columbia, as well as New York City, offer their residents an EITC.

The IRS maintains a list of jurisdictions that offer their own EITC. If you have questions about state or local eligibility requirements or how to claim EITC on those returns, check with those tax officials. Bankrate's state tax directory has information on how to contact those offices.

As the federal, not to mention the possible state, paperwork devoted to the earned income credit demonstrates, filing for it can be daunting. But don't be discouraged by the rules. Just make sure you follow them.

If you qualify, the EITC can give you back a nice chunk of change.


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