You could be eligible for the Earned Income Tax Credit, a refundable tax credit that will put money in your pocket even if you don’t owe any taxes. But to get it, you must file a tax return.
Created by Congress in 1975 “to offset the burden of Social Security taxes and to provide an incentive to work,” the Internal Revenue Service says the premise of the EITC is simple: “to help you keep more of what you earned.”
For the 2011 tax year, the most recent full year available, more than 27 million tax returns claimed nearly $62 billion in earned income tax credits. That’s up from 19.4 million returns for $30.4 billion in credits in 1997.
The IRS says the effect has been to lift people out of poverty — 6.6 million people, half of them children, based on 2011 tax year returns.
“EITC is one of the largest anti-poverty programs,” the IRS said.
The tax legislation sets out a series of 15 rules that taxpayers have to meet to qualify for the tax credit.
“You have to work, you have to have earnings and have your income below set limits,” said Barbara Weltman, a contributing editor to J.K. Lasser’s Your Income Tax 2014.
Income limits range from $51,567 for a married couple filing jointly who have three or more children to $19,680 for a married couple with no children.
You also have to fill out and submit a tax return, choosing married filing jointly, single or head of household for the filing status. Those who are married but file separately are not eligible.
To qualify, you also need a valid Social Security number. Investment income cannot be greater than $3,300, and you had to live in the United States for more than half of 2013.
The tax credit is geared toward families — the more children, the greater the credit.
For a family with three or more qualifying children, the maximum credit for tax year 2013 is $6,044. For families with no children, the maximum credit is $487.
“When there’s kids around it’s certainly significant,” said Dave Du Val, TaxAudit.com’s vice president of consumer advocacy.
Yet as many as 25 percent of taxpayers who might qualify don’t file for the credit, according to Du Val. The IRS puts the number at 20 percent.
Sometimes it’s just a matter of people being unaware the credit exists, or assuming they won’t qualify.
“There are different instances and different life events that might make people eligible for it,” said Craig Richards, director of tax services at Fiduciary Trust.
Military personnel might qualify, as well as taxpayers who lost their job mid-year and went on unemployment.
Another example, Richards said, is someone who is now receiving disability payments and is younger than retirement age. “That can be construed to be earned income,” he said. “You can include that in the calculation.”
There’s also the perception that EITC is a poor person’s tax credit.
“They may think of themselves as a middle-class person and just had a bad year,” Weltman said.
Richards said the complexity of filing for the credit also can be a deterrent. He said there’s a four-page form, Form 8867, for paid preparers to fill out with attesting that someone qualifies for the credit.
Taxpayers doing their own return have to file a one-page form, Schedule EIC, to claim the credit. There are worksheets that go with the form, but those don’t have to be filed.
Tax preparation software can help point out whether you are eligible, but you’ll still have to go through the qualifying questions.
Du Val said people should take advantage of the credit if they qualify. “It’s not illegal. It’s not immoral.”
The IRS has worked to build awareness of the Earned Income Tax Credit. It has held special EITC awareness days and worked with employers and others. The agency has posted a YouTube video touting the benefits of the credit.
“The Earned Income Tax Credit can be a boost to you and your family,” the IRS employee on the video says. “...You earned it, now file to claim it and get it.”
There’s also an EITC assistant on the IRS website to help people determine whether they qualify and for how much.
And it’s not just the federal credit. The IRS says 22 states, the District of Columbia, New York City and Montgomery County, Md., also have earned income credits. “If you qualify to claim EITC on your federal income tax return, you also may be eligible for a similar credit on your state or local return,” the agency said.
Because it is a refundable credit, EITC also is prone to fraud. In a report released in October, the Treasury Inspector General for Tax Administration estimated that $110.8 billion to $132.6 billion in earned income tax credits was paid out erroneously over the past decade. It said the IRS has made little progress in reducing fraud in the program.
In a response attached to the report, Beth Tucker, deputy IRS commissioner for operations support, said the agency is continuing to take steps to try to reduce erroneous EITC payments. “The IRS continues to believe that the new regulation of tax return preparers will help drive increased EITC compliance, decrease fraud and reduce improper payments,” she said.
The agency also has said that EITC claims are twice as likely to be audited.