Earned Income Tax Credit could put more money in your pocketThe Earned Income Tax Credit (EITC or EIC) may sound complicated, but it’s actually a simple concept designed to assist working families.
The Earned Income Tax Credit (EITC or EIC) 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, says the Minnesota Society of Certified Public Accountants (MNCPA). Yes, there are requirements you need to meet, but you should take the time to see if you qualify. After all, who couldn’t use a little more money?
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 Internal Revenue Service (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?
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 (EIC Worksheet) in the instruction booklet for Form 1040, Form 1040A or Form 1040EZ, and the Earned Income Credit (EIC) Table in the instruction booklet. Alternatively, use the EITC Assistant Tool available on the IRS website. It is available in both English and Spanish.
In 2012, working families with children that 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.
What it means to you
The EITC can make a significant difference for hardworking families. 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.
A certified public accountant (CPA) can help
Don’t dismiss applying for the Earned Income Tax Credit because there are requirements and you’re not sure if you qualify. There are online tools to help you determine if you are eligible, or you can talk to your certified public accountant (CPA) to help you understand your options. Don’t have a CPA? Visit mncpa.org/referral to locate one in your area.