The Earned Income Tax Credit: How to make it work for you

A YourMoneyCounts® Exclusive by award-winning writer Ilyce R. Glink

The young woman sat in a chair in a tax preparer's office quietly sobbing. She had decided to file for bankruptcy, but the court required her to get her back tax returns prepared and filed.

She told her tax preparer that filing her back taxes would be just another nail in her financial coffin.

As her tax preparer worked on the documents, it became apparent that the woman had never heard about the Earned Income Tax Credit (EITC). She had a child living with her in her home but had been scraping by on low wages and some child support.

When the three years of tax returns were filed, the young woman had three large refunds coming to her from the IRS. It was so much money, that she ultimately did not have to file for bankruptcy.

According to the IRS, the Earned Income Tax Credit is a refundable tax credit intended to help working Americans who do not earn high wages. "Refundable" means you receive the cash no matter how much tax you owed or paid to the IRS.

Tax experts say the biggest Earned Income Tax Credit goes to those folks who earn between $10,000 and $20,000 per year and have children living in the household.

If you earn $20,000 per year, you paid $1,530 for Social Security and Medicare taxes. If you have two children living in the house, the Earned Income Tax Credit you'd qualify for is about $4,400, or 22 percent of your annual income.

Thanks to the American Recovery and Reinvestment Act (ARRA), a temporary increase in the Earned Income Tax Credit for tax years 2009 and 2010 means more Americans will now qualify.

The income phase-out range was raised for married couples with children and for taxpayers with three or more children. This will allow more working Americans to qualify for the Earned Income Tax Credit.

And, by expanding the tax credit to three children, parents will be less likely to allow someone else to claim their children for Earned Income Tax Credit purposes, cutting down on fraudulent claims. In addition, over the past few years, the IRS has stepped up its requirement for Social Security numbers for children claimed for the Earned Income Tax Credit, and has been checking those numbers to help reduce fraud further.

In addition to the federal Earned Income Tax Credit, at least 22 states offer their own version of the tax credit. San Francisco, New York City and Montgomery County, Maryland, also offer local EITCs available to residents along with the state and federal programs.

Here's what you need to know to make the Earned Income Tax Credit pay off for you in a big way.

Who Qualifies…

To qualify for the Earned Income Tax Credit, your earned income and adjusted gross income (AGI) must each be less than

• $43,279 ($48,279 if married filing jointly) with three or more qualifying children
• $40,295 ($45,294 if married filing jointly) with two qualifying children
• $35,463 ($40,463 if married filing jointly) with one qualifying child
• $13,440 ($18,440 if married filing jointly) with no qualifying children

…And Who Doesn't

• If your investment income is over $3,100 for the year, you'll be disqualified.
• The Fostering Connections to Success and Increasing Adoptions Act of 2008 changed the uniform definition of a child for tax purposes. According to the IRS, a "qualifying child" must be younger than the taxpayer claiming that child, unless the child is disabled, and the child must not have filed a joint return, except to claim a refund.
• If the same child is a qualifying child of a parent and of another relative, the person who is not the parent can claim the child only if his or her AGI is higher than the AGI of any parent of the child.

How Much Can You Get?

The maximum Earned Income Tax Credit for tax year 2009 is

• $5,657 with three or more qualifying children
• $5,028 with two qualifying children
• $3,043 with one qualifying child
• $457 with no qualifying children

How Much Can I Get from My State?

Roughly half the states plus the District of Columbia offer an Earned Income Tax Credit to help reduce taxes and supplement wages for low- and moderate-income working families, according to the Center on Budget and Policy Priorities.

Typically, these programs piggyback on the federal Earned Income Tax Credit, offering additional credits of 3.5 to as much as 43 percent of the federal tax credit.

Most of the states that offer an Earned Income Tax Credit have made it refundable. In Delaware and Virginia, the tax credit is not refundable, meaning that it is limited to the tax you already paid. Rhode Island's Earned Income Tax Credit is partially refundable while Maine's Earned Income Tax Credit, which for tax year 2009 is not refundable, will become partially refundable, effective in tax year 2010.

Are There Any Other Earned Income Tax Credits?

New York City and Montgomery County, Maryland, also offer Earned Income Tax Credits to residents.

In addition, special Earned Income Tax Credit rules exist for members of the military, members of the clergy, those who are disabled and those affected by disasters. (Find out more at this IRS link: http://www.irs.gov/individuals/article/0,,id=150708,00.html.)

What Should I Do with My Earned Income Tax Credit Refund?

The first thing you should do is take a deep breath and think about your income, expenses and debt.

Taxpayers who receive 20 percent of their annual income in a single check should think carefully before making any financial decisions. If you're not in the position to save any of that money for the long-term, make sure you have enough for needed car repairs, rent, food, and utilities before spending it on education or entertainment.

To get the maximum benefit from your Earned Income Tax Credit, make sure you set up direct deposit with the IRS. You can give the IRS your savings or checking account number, and within 10 business days of filing your return your refund check will pop up in the account. It's the fastest way to get your entire refund.

Where Can I Get Help with Filing My Return and Claiming the Earned Income Tax Credit?

The Earned Income Tax Credit can be complicated. But if you cannot afford to hire a tax preparer to complete your return, you may be eligible for help from a taxpayer assistance clinic, where they work with the Earned Income Tax Credit.

The IRS's Volunteer Income Tax Assistance (VITA) service and the Tax Counseling for the Elderly (TCE) offer free tax help for taxpayers who qualify. Taxpayers with an income of $49,000 or less should qualify for free tax-preparation services. Community volunteers are trained in special tax credits, such as the Earned Income Tax Credit, and will help qualified taxpayers file electronically for free.

To find the nearest VITA site or more information on the TCE, call toll-free (800) 829-1040. To locate the nearest AARP Tax-Aide site, call toll-free (888) 227-7669. Military personnel can take advantage of the Armed Forces Tax Council (AFTC), which, according to the IRS website, provides tax program coordinators for the Army, Air Force, Navy, Marine Corps and Coast Guard. Airmen, soldiers, sailors, marines, guardsmen and their families worldwide receive free tax-preparation assistance at offices within their installations.

Check Out These Links for Additional Information

• Want to know if you qualify for the Earned Income Tax Credit? The IRS offers a tool called the EITC Assistant. Click here to check it out: http://www.irs.gov/individuals/article/0,,id=130102,00.html.
• Want to know if your state offers an Earned Income Tax Credit? Visit http://www.cbpp.org/cms/index.cfm?fa=view&id=2987.
• Want to know more about the Earned Income Tax Credit? Visit http://www.irs.gov/individuals/article/0,,id=96406,00.html.