If you're single with income below $12,000, or married with children and income below $36,000, it's worth checking into the Earned Income Tax Credit (EITC) when you do your income...
If you’re single with income below $12,000, or married with children and income below $36,000, it’s worth checking into the Earned Income Tax Credit (EITC) when you do your income taxes this year.
All you need do to claim the credit is fill out a federal tax return along with the worksheet that tells you how much your credit will be. That sounds simple, but unfortunately it’s pretty complicated.
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The most recent IRS figures show 27 to 32 percent of all earned-income claims had errors.
Nationally, 21 million low-income families qualified for the credit last year and received $36 billion. But IRS studies indicate that millions more are eligible but fail to claim the credit.
David Williams, director of the program at the Internal Revenue Service, said slightly more than 75 percent of eligible taxpayers claim the credit.
More than 90 percent of eligible mothers with children claim the credit, he said.
But you don’t have to have a child to claim the credit.
Congress originally approved the tax-credit legislation in 1975 in part to offset the burden of Social Security taxes and to provide work incentives.
Expansions to the program were adopted by Congress in 1986, 1990 and 1993.
The maximum credit is $4,300 for a family with two or more children. When the tax credit exceeds the amount of taxes owed, it results in a refund.
“The EITC lifts millions of families above the poverty line every year,” Williams said. “It becomes a supplement to their earned income.”
Even if you don’t owe taxes, be sure to file an income-tax return. That’s the only way you can claim the credit.
But make sure you qualify, because the IRS monitors the program closely for errors and fraud. The amount of the credit depends on your earned income, the number of children you have and your filing status.
To start, you must have earned income from wages or self-employment.
The most common error is incorrectly claiming a “qualifying child,” Williams said.
You must have lived with your child for more than half the year. It’s most challenging for parents who are separated or divorced.
“Figuring out whether the kid lived with you or lived with your spouse or ex-spouse and when and how becomes very complicated,” Williams said.
To make that easier, the IRS is testing a program that allows taxpayers to provide documents, such as school records and utility bills, that prove where taxpayers and their children lived.
Experts said taxpayers eligible for the credit aren’t claiming it because they don’t know about it or have misconceptions.
“People who are lower-income-earning individuals thought that if they received an earned-income credit, that somehow it would reduce their benefits from Social Security or food stamps,” said Bill Cafero, a senior manager at Ernst & Young’s Personal Financial Counseling practice. “That’s totally not true.”
It’s a good idea to seek a tax adviser to help you file for the credit, but beware of unscrupulous ones.
The IRS has nailed some preparers who have prepared false tax returns to help clients fraudulently claim the credit.
Also, stay away from preparers who offer high-interest loans to get your credit to you faster.
“This is a population by and large that needs disposable income, and someone offering them a loan for a quicker return on the tax credit and takes a fee for it — we consider that somewhat predatory,” said Donna Klein, president of Corporate Voices for Working Families in Washington. The nonprofit organization helps employers educate employees about the credit.
“Many times the costs of the quick return are not at all evident to the tax filer,” she said.
Lastly, be skeptical of preparers who promise you the moon.
“We have evidence of preparers who essentially run preparer mills,” Williams said. “They encourage low-income taxpayers to come in and claim the credit, promising them they’ll get them their money.
“Ultimately, when we catch them, those poor people end up having to pay us back.”