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Earned Income Tax Credit: money in your pocket?
The Earned Income Tax Credit may sound complicated, but it's actually a simple concept designed to assist working families.
The EITC is a tax credit to help you keep more of what you earn by giving you a tax refund. Yes, there are requirements you need to meet, but you should take the time to see if you qualify.
What is the EITC?
The EITC is a refundable federal income tax credit for low- to moderate-income working individuals and families. According to the IRS, Congress originally approved the tax credit legislation in 1975 in part to offset the burden of Social Security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who qualify for and claim the credit.
Earned income is defined as all the taxable income and wages you get from working and includes:
Salaries and tips
Union strike benefits
Certain disability benefits received before you reach minimum retirement age
Net earnings from self-employment
Are you eligible?
In 2012, working people who have children and have annual incomes between $36,900 and $50,300 (depending on marital status and the number of dependent children) may be eligible for the federal EITC. Also, working people without children who have incomes below $13,900 ($19,200 for a married couple) can receive a very small EITC.
To claim the EITC on your tax return, you must meet all of the following requirements:
You, your spouse (if you file a joint return) and all others listed on Schedule EIC must have a valid Social Security number.
You must have earned income from working for someone else or operating a farm or business.
Your filing status cannot be "married filing separately."
You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
You cannot be a qualifying child of another person.
You cannot file Form 2555 or Form 2555 EZ (related to foreign earned income).
You must comply with requirements spelled out in the IRS document "EITC Income Limits, Maximum Credit Amounts and Tax Law Updates."
Investment income cannot exceed $3,200 for the year.
In addition, you must meet one of the following:
Have a qualifying child, or
If you do not have a qualifying child, you must be older than 25 and younger than 65 at the end of the tax year; have lived in the United States for more than half the year and not qualify as a dependent of another person.
After you know that you qualify for the EITC, you have two choices for calculating the credit:
Have the IRS determine the credit for you. Follow the instructions for Line 64a on Form 1040, Line 38a on Form 1040A or line 8a on Form 1040EZ.
Calculate the credit yourself using the Earned Income Credit Worksheet in the instruction booklet for Form 1040, Form 1040A or Form 1040EZ, and the Earned Income Credit Table in the instruction booklet. Alternatively, use the EITC Assistant Tool available on the IRS website in both English and Spanish.
What it means
For tax year 2012, the EITC is worth as much as $5,891 to families. For example, a single parent raising two children and earning $12,200 is eligible for an EITC refund of $5,236, a 41 percent increase in family income.
Research indicates that most eligible families use EITC refunds to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.
Don't dismiss applying for the Earned Income Tax Credit because there are requirements and you're not sure if you qualify. The IRS offers online tools to help you determine if you are eligible. Go to http://www.irs.gov and search on "EITC" for links. Or call a CPA for professional advice.
- Information and resources from the Minnesota Certified Public Accountants organization are available to the public at www.mncpa.org/information, including information for individuals and small businesses.