IRS offering assistance on earned income tax credit
BY Sandra Block
One of the anomalies of our tax system is that people with the least amount of money often have the most complicated tax returns. Exhibit A is the Earned Income Tax Credit, a program designed to help low-income workers.
To qualify for the Earned Income Tax Credit, your 2004 adjusted gross income must be less than: $34,458 ($35,458 if married) with two or more children. $30,338 ($31,338 if married) with one child. $11,490 ($12,490 if married) with no children. If you qualify, the maximum credit amounts for 2004 are: $4,300 with two or more children. $2,604 with one child. $390 with no children. Source: IRS
Who is eligible
To qualify for the Earned Income Tax Credit, your 2004 adjusted gross income must be less than:
$34,458 ($35,458 if married) with two or more children.
$30,338 ($31,338 if married) with one child.
$11,490 ($12,490 if married) with no children.
If you qualify, the maximum credit amounts for 2004 are:
$4,300 with two or more children.
$2,604 with one child.
$390 with no children.
The Earned Income Tax Credit was created in 1975 to help offset the cost of Social Security taxes and encourage people to work. The credit provides a dollar-for-dollar reduction in your tax bill. If your credit exceeds the amount you paid in taxes, you'll get a check for the difference.
With your W-2 forms now in hand, it's a good time to find out whether you're eligible for the credit. The Internal Revenue Service has launched a new tool on its Internet site, www.irs.gov, that will help you determine whether you qualify. The help comes through the EITC Assistant, which asks a series of basic questions.
The screening tool can help military families who may benefit from a tax provision enacted by Congress last year. For the first time, members of the military can include their combat pay when they calculate their eligibility for the Earned Income Tax Credit. Combat pay isn't taxable, but including it in the tax-credit calculation may increase the amount of the credit for some military families, says David Williams, EITC director for the IRS.
There's a catch, though: You have to include all your combat pay or none at all. You can't include just enough to get the maximum credit, the IRS says. You can use the EITC Assistant to figure out whether including combat pay will increase your Earned Income Tax Credit.
If you plan to claim the EITC, handle your return with care. Errors and omissions may jeopardize your credit. Among the most frequent problems:
Filing status. Married couples must file jointly to qualify for the credit. That may reduce or eliminate the credit, but the IRS doesn't allow multiple choice. If you're married and file as "single" or "head of household," you could be disqualified.
Shared children. Only one parent can claim a child for purposes of the Earned Income Tax Credit. This can be a problem for divorced parents or caregivers who share custody of a child, Williams says. You must provide a Social Security number for each child, which helps the IRS identify cases in which two parents are claiming a credit for the same child.
The IRS has a "tiebreaker rule" for estranged parents who can't agree on who should claim a child. You can find more information through the EITC Assistant.
Earned income. Underreported income is one of the most common errors associated with the tax credit, Williams says. Report all wages, tips and self-employment income earned during the year. Child support, pensions and unemployment income are not counted, according to the IRS. Income from investments, such as dividends, isn't counted, but if it exceeded $2,650, you're ineligible for the Earned Income Tax Credit.
Unfortunately, confusion about the Earned Income Tax Credit has created opportunities for chicanery.
Some unscrupulous tax preparers have advised clients to hide some of their income or invent children to inflate their credits. Others use tax preparation as a pretext to market dubious products and services, such as "rapid refund" loans. These loans are an advance on your refund, but often carry high interest rates and fees.
Some employers are taking a more active role in educating workers about the credit.
You can prepare and file your tax return through the IRS Free File program, available at www.irs.gov. There, companies offer free online tax preparation and e-filing to those eligible.