Earned Income Tax Credit
The Earned Income Credit--also called the Earned Income Tax Credit, the EITC, and the EIC--is a fully refundable tax credit for people who work but don't make a lot of money. If you made under $43,279 during 2009, you may qualify for the EIC. The maximum Earned Income Credit for 2009 was $5,657. That's a lot of cash but anytime you're dealing with the EIC, you have to make sure you're claiming the credit correctly. The IRS audits this credit frequently.
Largest Anti-Poverty Program in America
"Fully refundable" means that the Earned Income Credit will be paid out to you in your tax refund even if you do not pay any income tax. Refundable credits are rare. Most tax credits can only reduce your income tax. The EIC can actually create a tax refund. For people struggling to make ends meet, the Earned Income Credit is the most important refundable tax credit in our current tax code. In fact, this tax credit is now the single largest poverty-fighting government program in America. The economic struggles of these past few years have increased the number of people who will qualify for the EIC. Unfortunately, it is estimated that approximately 25 percent of taxpayers who qualify for the Earned Income Credit do not claim it.
Pronto processes thousands of Earned Income Credit claims per year, so if you have questions about the Earned Income Credit, please feel free to contact us today. The Earned Income Credit Is Based On Your Earned Income. Every year, the media gets everybody all worked up by talking about the Earned Income Credit as if you either qualify or you don't, and if you qualify you automatically get the maximum amount. People hear about their friends getting $5,000 refunds through the EIC and they get jealous and want the same or more. But it's not quite that simple. The first thing to realize about the EIC is that it's based upon your earned income. Different amounts of earned income qualify for different amounts of Earned Income Credit. Just because you qualify for the Earned Income Credit doesn't mean that you qualify for the maximum Earned Income Credit. Instead, your EIC will vary according to your income.
The Earned Income Credit Is Also Based On How Many "Qualifying Children" You Have
Besides your income, the number of "qualifying children" you claim on your tax return is the other major factor that affects the amount of Earned Income Credit you may receive. The Earned Income Credit for two children is approximately double the amount of the Earned Income Credit for one child. And now, new in 2009, you can claim the Earned Income Credit for three children. To figure out if you qualify for the Earned Income Credit and for how much, you need to take a look at the "Earned Income Credit Tables." Using the EIC Tables, you would first find your income, then find the number of "qualifying children" on your return, and then find out your EIC amount.
Make Sure You Qualify Before Claiming the EIC
The IRS estimates that about one third of all Earned Income Credit claims are either incorrect or fraudulent. Therefore, the IRS has been investigating Earned Income Credit fraud more and more every year. Make sure to read our tax article "Qualifying for the Earned Income Credit" before claiming this credit. The basic rules for claiming the EIC with respect to qualifying children is that the child must be related to you, has to be either under age 19 or a full-time student, and must have lived in your household for at least six months of the year. If the child you're listing for the Earned Income Credit doesn't live with you, for instance if you are a non-custodial parent, you generally cannot claim the EIC for that child. Because the amounts of money involved can be significant--EICs are commonly worth thousands of dollars--it can be extremely painful when the IRS audits your Earned Income Credit from a past year and then makes you pay back the entire amount plus penalty and interest.
The EIC can be a life-saver, but if you claim it incorrectly, it can also be a complete disaster.