The Earned Income Tax Credit (EITC) has two purposes. First, it is an incentive to encourage people to work and discontinue public assistance. Second, EITC provides financial help for low-income taxpayers and their families derived from income, which the tax code identifies as “earned income.” EITC is a refundable credit, which means if any unused credit remains after offsetting a tax liability, the remainder is refunded to the taxpayer. Earned income tax credit cannot be used for married couples filing separately and can only be used on one taxpayer’s income tax return. Any children used to qualify the taxpayer for the credit are also required to have a SSN. Also, because this credit is meant for low income individuals, if a taxpayer is working overseas and can exclude foreign earned income, he or she cannot claim EITC. Taxable earned income includes:
• Wages, salaries, and tips;
• Union strike benefits;
• Long-term disability benefits prior to minimum retirement age; and
• Earnings from self-employment.
Taxable earned income does not include any form of earned income that is excluded from income, such as a clergyperson’s housing allowance, excluded military combat pay (but see the election for combat pay later), tax-deferred retirement contributions, or excludable dependent care benefits.
In order to have a qualifying child for EITC, the qualified children must have lived with the taxpayer in the United States for more than half of the year. Generally, for EITC purposes, a qualified child must be younger than the taxpayer and be under the age of 19 or a full-time student under the age of 24 who had the same principal residence as the taxpayer for more than half of the tax year and is not married and filing a joint return (some exceptions may apply). Exceptions to the residence requirement include temporary absences from the home, such as for school, vacations, illness, and military service.
A “qualified child” is a taxpayer’s:
• Son, daughter, adopted child, stepchild, eligible foster child, or a descendant of any of them (for example, a grandchild); or
• Brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them (for example, a niece or nephew).
Many eligible taxpayers fail to claim EITC because they don’t fully understand the tax credit, or they may have not been properly informed by their tax professional. For example, the IRS estimates that 1.5 million taxpayers don’t realize that taxable long-term retirement benefits received before reaching minimum retirement age qualify as earned income, making them eligible for the EITC. The IRS also estimates 20% to 25% of eligible taxpayers fail to claim EITC for different reasons. Contact Total Accounting for any questions relating to EITC at email@example.com.