The Earned Income Tax Credit is not a refund of tax monies paid by a taxpayer, but rather a credit for low to moderate income families with dependent children. This credit can be claimed during tax preparation and the funds added to any refund that is owed to the taxpayer. It also can offset payroll taxes owed through self employment. In some instances those below the poverty line with earned income and a single filing status can claim the credit, although the amount reduces greatly.
Qualifying
Before the Earned Income Tax Credit (EITC) can be taken, the tax payer must prepare form EITC to see if they qualify for the credit. The EITC rules are strict and the credit or qualification for it depends on the household size, filing status, income and dependents. For example, for tax year 2008, a taxpayer with no children who will have a filing status of single must make below $12,850.00 to qualify for the credit. Then the credit is only $4. For those that are married or filing as Head of Household, the income levels change. If a taxpayer has taken the EITC in previous years falsely or by error, they cannot take the credit for ten years, regardless of their income or dependents.
Claiming Dependents
Claiming dependents on your 1040 tax form and claiming the same dependent for an EITC credit is different. Just because a person may qualify as a taxpayer’s dependent, does not mean that dependent is eligible for the Earned Income Tax Credit. A dependent must be under 19 years of age and reside with the taxpayer for 12 months of the year to qualify for a full credit. If residency is only a partial year, the credit will be adjusted. You must provide more than 50% of the expense for the said dependent as well.
Filing
To take advantage of the Earned Income Tax Credit, file Schedule EIC with the 1040 tax forms for the filing year in which you are in. Provide the child’s complete name and Social Security Number on the EIC schedule. Pay special attention to Box 5 and Box 6. These are often left blank, and will delay your credit if not properly completed. Complete the child’s relationship to the taxpayer as well as the number of months they lived with them. The maximum number of children that can be claimed for the EITC is two, no matter what the taxpayer’s income or filing status. For taxpayers with four children, two can be claimed on Schedule EIC, while all four can be claimed as deductions on Tax Form 1040.
Benefits
The benefits of the EITC are great for moderate to low income working families. This credit can add extra funds to a weekly paycheck through the Advance EITC, or make a nice vacation fund when tax returns are completed. To take advantage of the Advance Earned Income Tax Credit option, alert your payroll professional and the IRS of this decision. For the average taxpayer with an credit of $3000.00, an extra $57.00 can be seen on a weekly paycheck.
Penalties
There are stiff penalties when a taxpayer takes advantage of the EITC, although they did not qualify for it. In most instances, when the credit is filed for, but the taxpayer does not qualify, there is a restriction from taking the credit for ten years. During this ten year period, the Earned Income Tax Credit cannot be claimed, even if income and household size would qualify the taxpayer. Always double check tax forms before submitting to the IRS to prevent these types of mistakes.
