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Earned income tax credit: Valuable but often overlooked

PERSONAL FINANCE

A family with two children can get a refund of up to $4,824, but about one-quarter of qualifying recipients don't claim the credit, the IRS says.

February 22, 2009|Kathy M. Kristof

If you had a job at any time during 2008 but didn't earn much money, you could qualify for one of the nation's most lucrative, and most frequently missed, tax breaks -- the earned income tax credit.

It is a tax break that can land a family with two children a refund of as much as $4,824 -- even when they paid no federal income tax. But about one-quarter of those who qualify don't claim the credit, the Internal Revenue Service says.

Some people miss it because they don't earn enough to be required to file a tax return, and you can't claim the credit unless you file. Others may be confused, thinking it is available only to those with children. The credit is considerably more valuable for parents, but childless workers can claim it too.

Here are some questions and answers about the credit.

What do you need to know to claim this credit? Who qualifies?

There are 20 factors that determine whether you qualify and how much you get. The main issues:

* Your total income must be below $15,880 if you have no children, less than $36,995 if you have one qualifying child and not more than $41,464 if you have two or more qualifying children.

* You must not be a dependent of another taxpayer.

* If you have no qualifying children, you must be between the ages of 25 and 65.

* You must be a U.S. citizen or a legal immigrant for the entire year.

* You must have a valid Social Security number for yourself and any child claimed.

* Your filing status may not be "married, filing separately."

* You must have income from work, and unless you're in the military, your work must be in the U.S.

* You may not have more than $2,950 in investment income.

How much is this credit worth?

The maximum credit amount is $438 for those with no children, $2,917 for those with one qualifying child and $4,824 for those with two or more children.

Generally speaking, the largest credits go to people whose income is a little less than half of the maximum threshold for their filing status. You'd get the maximum break as a dual-income family, for instance, if you earned about $18,000 and had two children.

Which children qualify?

A dependent child claimed for this tax credit must meet age, relationship and residency tests. The simplest is the residency test, which requires that the child live with you for more than half the year in the U.S.

The relationship test demands that the child be dependent on you and be your son or daughter, stepchild or foster child, grandchild, brother or sister (including step-sibling), niece or nephew.

Generally, the child must be younger than 19 or, if a full-time student, younger than 24. However, if the child is totally and permanently disabled, he or she could qualify as your dependent at any age.

What if the child's parents are divorced?

A child may be claimed by only one parent. If two parents are trying to claim the same child, the IRS will give the credit to the one with whom the child lived the most -- or, if that's the same, the one with the highest income.

How do you claim it?

You must fill out a form EIC and file it with your 1040 or 1040A form. The EIC form, as well as an online calculator, can be found on the IRS website at www.irs.gov/eitc.

A 58-page booklet -- Publication 596 -- explains the credit and how to claim it. The publication can also be printed or downloaded from the IRS site. However, as the publication suggests, the credit is complicated and people who claim it are prone to error.

The most common errors include attempting to claim children who don't qualify, failing to include Social Security numbers for yourself or a qualifying dependent, or using the wrong filing status.

Because errors are common, the IRS may ask for additional information when you claim the credit, such as birth certificates and school records for qualifying children. It is not necessary to include these with your tax return, but you should have them available.

Even innocent errors could leave the impression that you're attempting to cheat to receive this break. The IRS says that cheating can affect your ability to claim the credit now and in future years. Use care.

Where can you get help?

If you're uncertain about whether you're filing correctly, seek help.

There is a substantial amount of assistance available, both online and in person. The online tools include a questionnaire that can help you determine whether you qualify and a work sheet that can estimate your credit amount.

In addition, those who earn less than $56,000 -- as anyone who qualifies for the tax credit would -- are qualified to use the IRS' free-file system, which provides tax software to prepare and file a simple return.

The link to the free-file system is on the IRS home page at www.irs.gov.

However, for many people, the best help comes from Volunteer Income Tax Assistance Centers, which are set up in schools and community centers nationwide during tax season to help seniors and low-income filers prepare their returns. You can find local tax assistance center sites by calling the IRS tax hotline at (800) 829-1040.

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kathykristof24@gmail.com

Kathy Kristof is a personal-finance author and syndicated columnist.

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