Millions of people each year qualify for the earned income tax credit but don't claim the benefit. It can mean much bigger refunds for low-wage workers, but its rules and qualifications can be confusing. Here are some common questions and answers about the tax credit:
Q: What is it?
A: The earned income tax credit, or EITC, helps working poor families get out of poverty. For those who qualify, it makes low-wage jobs pay more by refunding payroll and income taxes. It sometimes means big refunds, especially for workers with children.
Q: How much is it worth?
A: The IRS estimates that 22 million low-income families claimed credits worth $38 billion last year. Workers can claim as much as $4,300, but that amount varies according to income and family size.
To determine how much you might earn, try a new tool on the IRS web site called EITC Assistant. It's available in English and Spanish. For those with limited English skills, the IRS hosts informational meetings in Chicago, Houston, Los Angeles and Miami.
You can also calculate the credit using IRS worksheets or ask the IRS to calculate it for you. A tax professional also can help.
Q: Who is eligible?
A: If you worked last year and earned less than $35,500, check to see if you qualify. Individuals sometimes overlook the credit because they believe it's too complicated, they don't have children or their income is so low they don't have a legal obligation to file.
The credit can be claimed by individuals who earned $11,490 or less. Among families with children, the EITC can be claimed by individuals who head a household with one child and earned less than $30,338, and those with two children who earned less than $34,458.
Married couples can earn $1,000 more than single individuals in each category and still claim some of the credit. Your investment income cannot exceed $2,650.
Q: Do all children count?
A: Taking care of children counts toward the EITC if the child is a son, daughter, adopted child, grandchild, great-grandchild or eligible foster child under age 19. Full-time students under age 24 and disabled children of any age also count. The child must live with you for more than half the year.
Stay away from scams that encourage you to add fraudulent children or inflate your income to claim a bigger credit. A deliberate error can lead to penalties, fines and impair your ability to claim the credit in future years.
Q: What if I'm in the military?
A: Combat pay penalized military families in the past because it didn't count toward the EITC. New rules let military families choose to count their combat pay toward the EITC if it means a bigger refund. You must count all or none of the combat income.
Q: Do I have to wait until I file my taxes to claim the credit?
A: No. If you have at least one child, you can apply for the Advance EITC through your employer and receive a portion of the credit in each paycheck. Ask your employer for a Form W-5 to request the Advance EITC. You must reapply each year.
On the Net:
Publication 596, IRS EITC Assistance: http://www.irs.gov/individuals/article/0,,id=130102,00.html
Corporate Voices for Working Families Guide for Employers: http://www.cvworkingfamilies.org/downloads/EITC%202005/cards-FINAL.pdf
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