It Could Mean More Money in Your Pocket
The Earned Income Tax Credit (EITC or EIC) is a tax credit designed to assist working families. It can help you keep more of what you earn if you qualify, say tax experts at the Pennsylvania Institute of Certified Public Accountants (PICPA). 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 IRS, Congress originally approved the credit in 1975 in part to offset the burden of Social Security taxes and to provide an incentive to work. Should the EITC exceed the amount of taxes owed, a tax refund is available to those who qualify for and claim the credit.
Earned income is defined as all the taxable income and wages you get from working, which includes salaries and tips, union strike benefits, certain disability benefits received before you reach minimum retirement age, and net earnings from self-employment.
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 running 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. If you do not have a qualifying child, you must be at least 25 years old or older but under 65 at the end of the tax year, live in the United States for more than half the year, and not qualify as a dependent of another person.
If 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, or 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 the 2012 tax year, 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 needed to commute, and, in some cases, obtain additional education or training to boost their employability and earning power.
A CPA Can Help
Don’t dismiss applying for the EITC because you’re not sure if you qualify. There are online tools to help you determine if you are eligible, or you can talk to a certified public accountant (CPA) who can help you understand your options.
If you have questions about your taxes or other personal financial planning topics, contact your financial planner. To find a CPA in Pennsylvania by location or area of expertise, visit www.ineedacpa.org