Earned Income Tax Credits

The earned income tax credit (EITC) is available to people who work, but who earn less than the government’s ceiling for each filing status and family situation. For example, in 2006 the maximum you can earn and still be eligible for the credit is $38,348 if you’re married filing jointly, and have more than one qualifying child. In contrast, if you’re single and have no qualifying children, the maximum you can earn to qualify for the credit drops to $12,120.

To qualify for the EITC, you must meet several sets of specific conditions. First, you must work and earn income or be married to someone who works and earns income. In addition, you must:

• Have a Social Security number
• Be a U.S. citizen or resident alien
• Have $2,800 or less in investment income

You cannot:

• File your tax return as married filing separately
• Claim an exclusion for income earned outside the U.S.
• Have an adjusted gross income (AGI) higher than the earned income ceiling for your filing status and family situation

If you claim children, you must attach Schedule EIC to your tax return. The children must have lived with you within the United States for more than half the year, they must be related to you directly, by marriage or adoption, or be foster children and they must be younger than 19 (or younger than 24 if they are full-time students). Your disabled children, brothers or sisters may also qualify.

If you don’t claim children, you must be between 25 and 65 and have lived in the United States for more than half the year. In addition, you can’t qualify if you’re the dependent of anyone else.

EITC benefits

To claim the EITC, you complete the EITC worksheet, using special tables in the Form 1040 or Form 1040A instruction booklet or Publication 596 to find the dollar amount of credit for which you are eligible. The maximum in 2006 is $4,536 if you have two or more qualifying children, $2,747 with one qualifying child and $412 if you claim no children.

Like other tax credits, the EITC is subtracted from the tax you owe, thus reducing your overall tax bill. But unlike most other credits, it may provide a refund if your tax liability is less than the credit. Suppose, for example, that when you complete your tax return you find that you owe $150 in tax, but you have an EIC of $415. If the IRS agrees you are eligible, you will receive a refund of $265 ($150 tax due-$415 EIC = $265 refund).

If you claim the credit for at least one qualifying child, you may be able to receive the advanced earned income credit (Advance EIC). You’ll then receive some of the credit in your paychecks during the year. If you would like to take advantage of this option, you must give your employer a copy of Form W-5. You can ask your employer for a blank copy or download one from the IRS website (www.irs.gov).

Overcoming the hurdles

Applying for the EITC can be intimidating because you must meet a number of requirements and do several calculations. You may also find that the IRS requests supplementary information, or rejects your filing. But if you are confident you qualify, you are entitled to this credit and should persist. There are volunteer locations around the country that provide free tax assistance. You can call 1-800-829-1040 for the one closest to you.