Want a Bigger Tax Refund?
You May Qualify for Earned Income Tax Credit
By Kelvin E. Boston
Host Moneywise on PBS
Imagine socking away, say $500 in a holiday savings account and then at the end of the year, you tell the bank to keep it and the $100 in interest and promotion bonuses earned because you don't feel like filling out the paper work. Sounds nutty but there are millions of low income earners doing exactly that every April when they fail to take advantage of up to $4,300 in federal earned income tax credits (EITC). Some know the credit exists. But many are completely unaware, according to a totally unscientific survey I conducted recently among independent tax preparers and consumers.
The good news is the IRS estimates that in 2003 around 22 million low-income families claimed about $38 billion in earned income tax credits, a benefit which, in short, gives you money. Under EITC, you get back a portion of payroll and income taxes, which can mean big refunds, particularly for workers with children. Under the right circumstances, individuals qualify as well.
And the news is also good for military families. The maximum amount of income they can earn and still take advantage of EITC increased in 2004. What's more, formerly nontaxable combat pay now can be included when calculating earned income for earned income credit.
Low wage workers also can file for the EITC benefits without affecting welfare benefits. Monies the individual receives from the credit will not jeopardize eligibility for food stamps, low-income housing, Medicaid and supplemental security income, or temporary assistance for needy families.
In general, the only thing standing between the taxpayer and qualification for EITC is the detail in applying for the credit. But you don't have to go it alone. You can have the IRS or a tax preparer do the calculations for you.
If you prefer to prepare your own taxes you can calculate the credit using IRS worksheets or you might find help in a useful new tool on the IRS website (www.irs.gov) called EITC Assistant, which is available in English and Spanish. Just enter 'EITC Assistant' in the website's search engine. (Those with limited English skills living in Chicago, Houston, Los Angeles and Miami can attend informational meetings the IRS hosts in those cities.)
Although parents do benefit with a higher return, they are not the only qualifiers for the credit. A single low wage worker whose income is less than $11,490 can qualify for the credit as well. The maximum return for a worker supporting two or more children is $4300 and a worker with one child can expect to max out at $2,604. A qualified taxpayer with no children can expect a maximum credit of $390.
Investment earnings and self-employment income must be included when calculating qualification for the credit. Also, you will become ineligible if investment income exceeds $2,650.
Workers with children must meet additional requirements to take advantage of the credit, including the child's age, relationship and housing status for the tax year. Foster children also qualify if the child was placed in the home by an authorized placement agency.
Additionally, your child must have a valid social security number, individual tax identification number (ITIN), or adoption tax identification number (ATIN). Without one of these three identifiers you cannot claim your child for the credit.
Divorced parents who share custody of their children might have a more difficult time claiming the earned income credit. The parent who housed the child for more than six months is eligible for the credit. If the child spent equal time (six months) with both parents, the IRS may look to tiebreaker guidelines before awarding the credit. The IRS would assess whether one person is the parent, i.e., if one filer is a stepparent. In this case the parent would get the credit.
If both filers are the parents they would have to decide who would take the credit or the IRS would give the credit to the parent with the highest adjusted gross income. If there is more than one child involved and the parents shared equal custody throughout the year, the filers could choose which child would be claimed on either tax form.
The filer must be careful not to duplicate a child's social security information when applying for the credit. If separated parents claim the same child both filings will be subject to additional processing, delaying or denying the credit. Ultimately if both parents cannot come to a decision about which child would go where for tax purposes the IRS will help you out by looking to the tiebreaker guidelines.
Help yourself and take advantage of this tax break. More information about the earned income tax credit can be found in IRS Publication 596 or by calling 1-800-829-1040.
