Qualfiying for the EITC
by Bob Williams
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One of the most popular tax credits in the Internal Revenue Service’s shopping cart has been the Earned Income Tax Credit. This refundable income tax credit is targeted at low- to moderate-income working individuals and families. Approved by Congress way back in 1975, the EITC (often called just EIC) was seen as a way to offset the burden of Social Security taxes and provide an incentive to work.
When the EITC exceeds the amount of tax owed, it results in a tax refund for those who qualify. In order to do that, you’ll have to meet certain requirements and file an income tax return – even if you don’t owe any tax or aren’t required to file.
Step One – Income
As dumb as this might sound, you need earned income to qualify for the Earned Income Tax Credit. Apparently some folks have the mistaken idea they can apply for the EITC when they have no income, earned or otherwise. Not so. Here are the types of income that the IRS does not consider earned income:
- Interest and dividends
- Retirement income
- Social Security benefits
- Unemployment benefits
- Child support
- Pay for work while an inmate in a jail or prison.
This means, if the above income is your only source of income, you cannot claim the EITC. Taxable earned income that does qualify for the EITC includes:
- Wages, salaries and tips and other taxable employee pay
- Long-term disability payments received prior to minimum retirement age
- Net earnings from self-employment if you own a business or farm, or are a minister or religious order member
You may also qualify if you’re a statutory employee with income, or if you’re receiving strike pay as a union benefit. In short, there are two ways to get earned income in the eyes of the IRS: You work for someone who pays you, or you own or run a business or farm.
There are income limits; that is, if you make more than the IRS limit, you won’t qualify. For tax year 2013, for example, if you don’t have any children, your income (and Adjusted Gross Income or AGI) must be less than $14,340. If you’re married filing jointly, that limit is $19,680 without kids. The rate tops out at $46,227 (or $51,567 if married filing jointly) if you have three or more qualifying children. In all cases, any investment income must be less than $3,300 for the year.
If you’re not sure whether your wage situation qualifies for the Earned Income Tax Credit, look at the IRS Publication 4935, Guide to Earned Income Tax Credit, for more direction.
Step Two – Rules of the Game
If you pass the income test, there are other requirements you must satisfy before being deemed eligible for the EITC.
First, you must be a U.S. citizen (or resident alien living in the U.S. all year) with a valid Social Security Number, and have (as we just mentioned) earned income from working for someone, or owning or running a business or farm. The IRS also says your tax filing status cannot be Married Filing Separately, and you can’t be considered a qualifying child of another taxpayer.
If you’re a member of the American Armed Forces, serving in a combat zone, some special rules apply. Consult Publication 596 from the IRS for more information.
Last year, the average EITC was $2,355. For 2013, the credit could be worth as much as $6,044 for qualified taxpayers.
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