The EITC or EIC, also known as the Earned Income Tax Credit is what working people with low up to moderate-income acquire as a benefit. However, there are qualifications to get this. They must meet specific requirements and also file their tax return. EITC also deducts the amount of tax that the taxpayers owe and can give them a refund.
The amount of the benefit from the EITC depends on the taxpayer’s income as well as the total number of children. For the individual to claim one or more EITC per qualifying child, there must be requirements like a relationship, shared residency and age, and these three must be met. Taxpayers with no child and earn income below the standard that is stated by the IRS receive a small amount of EITC benefit. The US tax forms 1040A, 1040 and 1040EX are used to claim EITC for those who do not have qualifying children as their dependents. Taxpayers with qualifying children can claim their credit by filling up forms 1040 and 1040A.
EIC phases slowly and has a medium-length plateau. After this, it phases slower than before because it constantly phases in. For example, if the credit phases at 21% for taxpayers that have more than one qualifying child, it has 16% of taxpayers who have one qualifying child. Therefore, taxpayers must always choose one more dollar of their actual wages or salary and increase this by fifty-dollar increments. It is also preferred to allow an extra fifty-dollar increment per wages and salary by considering just the EITC. However, if the EITC is combined with other tested programs such as Temporary Assistance for Needy Families or Medicaid, the Marginal Tax Rate exceeds 100% in some circumstances. It depends on the state of residence of the taxpayer. Under these circumstances, net income rises faster than the increase in the taxpayer’s wage due to the phasing in of the EITC.
History of the EITC
The EITC was enacted in 1975. It was created with the intention that it expanded by the tax legislation on certain occasions, which included the publicized Tax Reform Act of 1986. It was then expanded in the years 1990, 1993, 2001 and finally 2009, even though the act raised taxes in general (specifically 1990 and 1993) and lowered the taxes in 2001. It also eliminated the other credits and deductions in 1986. Nowadays, EITC is one of the largest anti-poverty tools that Americans turn to. However, it is important to note that most income measures that also include the poverty rate, do not account for this credit.
A qualifying child, when defined, can be the taxpayer’s son, daughter, adopted child, stepchild or foster child or even any descendant. It can also be the taxpayer’s sister, brother, half-brother, half-sister, stepsister, stepbrother or other descendants like nephew, niece, great-nephew, great-niece. A qualifying child can also be an adopted child provided that he or she has been placed lawfully in the home of the taxpayer.
When the taxpayer is claiming for the EIC from a qualifying child, he or she must be older than the latter. The only exception for this is if the qualifying child is classified as totally and permanently disabled for that specific income tax year. A qualifying child can be as old as 18. A qualifying child is also a full-time student who can be as old as 24. A qualifying child with no age limitation is individuals who are disabled. Taxpayers who are parents claim their child or children as their dependents unless they are also waiving the credit for that year to another family member who is an extended relative with a higher AGI. It is also important to note that there is no support test for Extra Income Credit. There is just the six months plus one day shared residency test.
When Are Refunds Expected?
If the taxpayer claims the EITC as well as the ACTC (which is additional tax credit) on the tax return that they filed, the IRS must hold onto the refund of the taxpayer – even if the portion does not have anything to do with the ACTC or the EITC.
Qualifications for Earned Income Credit
To qualify for the EITC, the taxpayer must have an income because he has worked or he is running his firm or business and can meet the standard rules.
How to Claim EITC
Taxpayers must have filed a tax return before they can claim EITC. They need to submit the required documents and be on the lookout for the common errors that are made on filling up the forms. They should also be aware of the consequences when they file an EITC return, and an error was discovered. They should also be knowledgeable on how they can get help preparing for their return as well as what they should do just in case the EITC was denied. Most importantly, they need to know how they can claim the credit for previous tax years.
Why did I receive a letter from the IRS regarding EITC?
IRS sends letters out regarding EITC because they are suggesting the taxpayer to claim their EITC because, upon careful review of their taxes, they qualify for this. They also ask the taxpayers to follow up on the additional information and send these to the IRS so that their claim can be verified. IRS also calls to gather more information about the claim.
Who claims the credit and how to get the EITC
The taxpayer or his or her spouse (if a joint return was filed) and others listed as the dependents must all have SSNs that are valid and required for their employment and issued before the due date of the return. This is one of the requirements to claim the credit and also qualify for an ETIC. The taxpayers must also have enough earned income by working for a company or a business or running or owning his own.
If married, the IRS should not be filed separately. The taxpayer must also be a US citizen or a resident alien. It is very important that the taxpayer is not a qualified dependent (whether qualified child or qualified relative) of another taxpayer. He or she must also have met the earned income, investment income limits and AGI for the specific tax year.
If these requirements are all met, then the taxpayer is qualified for EITC. The next step is to file the tax returns with the IRS even if the taxpayer owes no tax or not required to file in the first place.
If IRS denied the taxpayer an EITC last year and he or she is qualified in the current income tax year, the taxpayer must attach the completed Form 8862 or what is also known as the Information to Claim Earned Income Credit After Disallowance to claim EITC. Taxpayers need not file Form 8862 if the IRS has decided to reduce or not allow the taxpayer to receive an EITC due to intentional disregard or recklessness concerning EITC rules.
Earned income also includes wages and taxable income that the taxpayer obtains from working for a company or running or owning his firm or business.
Taxable earned income covers the following:
Taxpayers can choose to include their nontaxable combat pay in their earned income that is taxable to get the EITC. They either have to include it or not include it at all. If they choose to do this, then they have to check if they can include this whenever the taxable increase the refund or deducts the amount of tax that is owed. If the spouse of the taxpayer is also eligible for nontaxable combat pay, then both of them can opt for one that is best. The amount of the nontaxable combat pay is shown on the Form W2 in box 12 with code Q.
How is the credit calculated?
After the taxpayer determines that he or she does qualify for EITC, there are two choices to calculate the credit:
If taxpayers are prohibited to claim their EITC for years and the year after that due to an error from reckless or intentional disregard of the rules for EITC, then the taxpayer is prohibited to claim EITC for two years. If the error was because of fraud, they could not claim EITC for the next decade. The date that IRS denies the EITC of the taxpayer and the date on which the taxpayer files the return affects the next time frame of 2 to 10 years, then they will be barred from ever claiming their EITC.
Other Requirements for EITC
Finally, another important note to look at is that it phases out by the adjusted gross income or the greater of the total earned income. For example, a married couple whose overall income amounts to $21,500 but has $3,100 investment income is eligible for the maximum credit, depending on the number of their qualifying child. That investment income cannot get any greater than $3,100. They also receive zero EIC. There are some incomes that range beyond this, depending on the increase of dollar investment as well as the result of the losses after dollars that have been taxed.