NEW YORK - Millions of low-income workers reduce their tax bills each year by taking advantage of the earned income tax credit. But many who are eligible for the credit aren't participating in this anti-poverty program.
"We've really stepped up our outreach on this," said Jordan Ash of the nonprofit ACORN community organizations group. "There are millions of people missing out on billions of dollars. It's money they're entitled to and they can use."
The earned income tax credit, or EITC, was created in the mid-1970s to encourage families to reduce their dependence on welfare programs. It's unlike most other credits in the IRS code because it's refundable, which means taxpayers can use the credit of up to $4,400 to offset any taxes they owe and still get a cash refund for the excess.
The IRS said 21.1 million taxpayers claimed some $39 billion in earned income tax credits in 2004. But studies by the Government Accountability Office and the Internal Revenue Service indicate that 15 percent to 25 percent of eligible taxpayers aren't applying for it.
Mark Luscombe, principal tax analyst at CCH Inc. of Riverwoods, Ill., which provides tax information and services to tax professionals, said some taxpayers may be overwhelmed by the complexity of claiming the EITC.
"It's one thing to have stuff that's complicated for wealthy taxpayers, who can afford to pay for preparation services," Luscombe said. "But to have it this complicated for lower income taxpayers, that's a real problem."
The qualifying income limits vary by the size of the family:
- $35,263 for a parent with two or more children, or $37,263 for those who are married and filing joint returns
- $31,030 for a parent with one child, or $33,030 for those married and filing jointly
- $11,750 for a person with no children, or $13,750 for those married and filing jointly
Taxpayers must have valid Social Security numbers for themselves and their children. A family qualifies if any of the children, including stepchildren and foster children, lived with the taxpayer for more than half the year. The "age test" requires that live-at-home children be under age 19 and full-time students be under age 24; totally disabled children of any age also qualify.
The maximum credits are $4,400 for taxpayers with two or more children, $2,662 for those with one child and $399 for those with no children.
This year, there are special rules for victims Hurricane Katrina, Luscombe said. Under the legislation, Katrina victims will have to report the income they earned in 2005 but they will be able to calculate the EITC using either 2004 income figures or 2005 income figures, whichever results in a higher payout, he said.
Leslie Tarbert, a teacher's assistant with the Early Head Start program in Kansas City, Mo., said the tax credit provided a real financial boost for her family.
"It's awesome," she said. "For me as a single parent, it's very helpful."
Tarbert, the mother of two girls, said she used her credit last year as part of the down payment on the purchase of a home.
"This year with the money, I'm paying my daughter's braces off," Tarbert said. "I also have to buy siding for one side of my house, and maybe think about putting gutters on."
Kathy Burlison, director of tax implementation for the H&R Block Inc., which prepared Tarbert's tax return, said the irony is that many low income people "have basically simple returns - except for the complexity of the EITC."
Many of these people also qualify for the additional child tax credit, which can result in refunds for some low income families' child care costs, as well as state and local earned income tax credits.
Burlison said tax preparers have computer programs that can help determine if people qualify for the credits and how best to claim them.
"For some people, that $4,400 is 25 percent of their total annual income," she noted. "When they're looking at that big part of their income, they want to make sure it's done right."
Many low-income families qualify for free tax preparation help at IRS-backed Volunteer Income Tax Assistance program. Many are staffed by IRS-trained community volunteers, including 75 operated nationwide by the nonprofit ACORN group.
Unfortunately, the availability of the credits has also led to allegations of fraud in the program. That, in turn, led the IRS to hold up without notice the payment on many of the refunds that were claimed in recent years. After a protest from the IRS taxpayer advocate, the agency said it will refine its auditing and notify taxpayers if their returns were being challenged.
The IRS also has put in place a test program that will involve sending letters to some 45,000 EITC claimants asking them to prove they have the children they say they do before the refund check is issued.
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