For years, Sandra Rascon filed her own tax return, never knowing that she was missing a huge tax credit -- one that could generate an annual refund worth nearly two months' pay for the health aide.
Three years ago, she stumbled upon a program offering tax preparation assistance for free and it changed her life. Last year, she bought her first home. The down payment came largely from tax refunds.
The single mother of four isn't the only taxpayer who qualified for the earned income tax credit to have missed a break for the working poor that can pay up to $4,716 this year. Experts estimate that as many as 1 in 4 people who qualify are unaware of the credit.
"A lot of these families are not filing tax returns because they earn less than the minimum required for filing," which is $17,500 for a married couple, said Elise Buik, president and chief executive of the United Way of Greater Los Angeles. "They are not dealing with any type of income tax preparation at all. Reaching them is a big challenge."
The United Way has launched an initiative to help people fill out the necessary tax forms to get the credit. It is offering tax assistance at more than 100 locations around Los Angeles. Similar efforts are underway in big cities nationwide. The Internal Revenue Service also offers free tax preparation through its Volunteer Income Tax Assistance program, which helps low-income and elderly filers in locations around the country.
"The earned income tax program is very important to us because we use it as a gateway to help families learn about financial literacy, get them banked and get them saving and investing," Buik said. "The program is important on its own, but it's a gateway to get these families other services too."
For Rascon, it provided a way to save for the three-bedroom Los Angeles home that she bought late last year.
"You can use the refunds for anything," she said. "But I was on a strict budget to buy this home. It was my dream. I can't believe I was able to do it. This year, I'm going to use the refund to buy furniture."
The earned income tax credit, launched in 1975, was initially designed to return to low-income workers a portion of the Social Security and Medicare taxes withheld from their paychecks. But after a series of changes over the last two decades, the credit generates a "refund" that typically exceeds the amount of tax withheld. In fact, the credit is considered the nation's largest anti-poverty program, delivering more than $36 billion to about 21 million families.
For example, a married couple who earned $17,500 last year would have had withheld from their pay $1,338 in Social Security and Medicare taxes -- and no federal income tax. If the couple have two children, they can receive $4,688 from the tax credit.
But claiming the credit is a challenge. It requires filling out extra tax forms and meeting various requirements. Who can claim the credit and how much can you get? Here's a guide:
Who is eligible?
The earned income tax credit is available to any legal resident who has a valid Social Security number and earned income that's under a threshold that varies based on marital status and whether you have children.
You are eligible if:
You have no children and earn no more than $12,590, or are married (and file jointly) and earn as much as $14,590.
You have one "qualifying" child and earn no more than $33,241 if you are single or $35,241 if you are married.
You have two or more qualifying children and earn no more than $37,783 if you are single or $39,783 if you are married. What if I have investment income?
The credit is mainly for workers who have income from wages, salary, tips, commissions and certain disability pensions. If you have more than $2,900 in investment income, such as interest, dividends or capital gains, you are disqualified from claiming the credit. You're also ineligible if you have tax-exempt income earned in another country.
Can I get the credit if I'm claimed as a dependent on someone else's return?
How much will I get?
That depends on your income and number of offspring. For the 2007 tax year, the maximum credit is $428 for those with no children, $2,853 for a parent with one qualifying child and $4,716 for a parent with two qualifying children.
What's a qualifying child?
A child generally is counted when calculating the credit if he or she is your child or grandchild, lives with you in the U.S. and was 18 or younger at the end of 2007. The age limit is lifted to 23 for full-time students. There is no age limit if the child is permanently and totally disabled. A qualifying child also must have a valid Social Security number.
What if I share custody?
The short answer is just one of you can claim each qualifying child. If both parents qualify and there's more than one child, you each could claim one child or one parent could claim both children. It's your choice, as long as both parents don't claim the same child.
How do I claim the credit?
You must file a tax return, including IRS Form EIC. You can have the IRS calculate the credit for you or you can calculate it yourself using the work sheet and tables accompanying Form EIC. If you figure it yourself, you put the credit amount on line 8a of Form 1040EZ, line 40a of the 1040A, or line 66a of the long 1040 form.
Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail email@example.com. For past Personal Finance columns, visit latimes.com/kristof.