Understanding the Earned Income Tax Credit
Each year, about 26 million people received the Earned Income Tax Credit (EITC), averaging over $2,400. Yet the U.S. Internal Revenue Service (IRS) estimates that a whopping 20 percent of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it, leaving money on the table that could mean the difference between getting ahead or staying in the red. It’s one of the reasons you should always file your taxes, even if you don’t think you owe or will receive money. If you qualify for this tax credit, you could put some of the money you receive from it toward your savings goal!
Check out the video below from Better Money Habits explaining how various factors such as children and marital status can determine if you qualify.
The Earned Income Tax Credit, or Earned Income Credit, or EIC is one of the largest tax credits available to low-income individuals and families.
And, it could be your key to reducing what you may owe in taxes, and in some cases, it may provide you with a refund.
Because the EIC is a tax credit, it’s a dollar-for-dollar reduction in what you owe in taxes. So, if your tax bill comes to $600 and you’re eligible for $500 in EIC, you’d only owe the IRS $100.
And the EIC is refundable. This is a bit of a tricky tax term, but essentially, a refundable credit can reduce what you owe the IRS to below zero. So if you owe, for example, $400 in taxes for the year and you’re eligible for $500 in EIC, you’d have a net balance of negative $100—so, not only would you not owe taxes for the year, but the IRS would also send you a refund of $100.
Even better, if you owe nothing on your federal taxes and qualify for $600 in EIC, you’d get a refund of $600.
Here are some factors that can determine whether you qualify, and how much you might qualify for:
- Your filing status—whether you are filing as single, head of household, as a qualifying widow or widower with a dependent child, or married filing jointly.
- The number of qualified children in your care—the qualifications are rather specific; you can check the IRS website to see whether your children qualify.
- And your adjusted gross income—AGI for short. That’s essentially your income—and your spouse’s if you’re filing jointly—minus certain tax deductions.
It’s also worth mentioning that you must have earned income, usually from an employer, but there are some other possibilities, for example: income from certain disability benefits will qualify as earned income for the EIC, but unemployment benefits won’t qualify. Again, the qualifications are rather specific; you can check the IRS website to see whether you qualify.
But the way it works is this: If your adjusted gross income is below a certain limit, you could qualify for the EIC. The specific income limit is determined by a couple of things. Your filing status—the limit is slightly higher for married couples who are filing jointly. And the income limit increases with each qualified child in your care—up to three children.
Beginning with your first dollar of earned income, the amount of credit you are eligible for increases until reaching a maximum level and then begins to reduce, or phase out, for higher income levels.
Besides your filing status, number of qualified children, and adjusted gross income, there are a few more requirements for claiming this credit:
- You, your spouse if you’re filing jointly, and any qualified children must have a valid Social Security number.
- Your filing status cannot be married filing separately—you have to file jointly.
- You cannot earn investment income above a certain limit.
- And you or your spouse if you’re filing jointly must be either a U.S. citizen or resident alien for the entire calendar year.
Now, you’re probably interested in finding out how much the EIC will reduce what you owe in taxes, or, what you might expect in terms of a refund. These amounts will change from year to year; fortunately, the IRS has an EITC Assistant at irs.gov.
By answering a few questions, you’ll be able to see if you’re eligible as well as how much your estimated EIC could be.
And if you do qualify, what are the next steps?
In order to claim this credit, you’ll need to file an EIC Schedule with your annual income tax return—that is, your Form 1040 or 1040A.
If you feel comfortable filing your tax return on your own and have access to a computer, the IRS now offers free online tax preparation software called "Free File," for those with adjusted gross income below a certain limit. This will guide you through some questions and answers to help you prepare your returns—without having to fill out all those complicated forms.
And if you prefer to get help from a real person, Volunteer Income Tax Assistance, or VITA, offers free, in-person tax help from IRS-trained and staffed community volunteers. You can find the nearest VITA location by using the search tool on the IRS.gov website.
It’s easy to see that the EIC has some major benefits, so it may be worth looking into to see if you qualify. By helping taxpayers reduce the amount of taxes they owe or provide a refund, the Earned Income Credit gives working families and individuals a much-needed financial boost.
Let Military Saves help you make the most of the money you save this tax season. It all starts when you make a commitment to yourself to save. Take the first step today and take the Military Saves pledge to save money, reduce debt, and build wealth over time. And it doesn't stop there. Military Saves will keep you motivated with information, advice, tips, and reminders to help you reach your goal. Think of us as your own personal support system.
#BetterMoneyHabits walks through the basics of the EITC and how to tell whether you might be eligible or not. Check it out here >> http://bit.ly/2IOv2GP @MilitarySaves
- Category: Blog
- Published: 23 March 2018