Thursday, March 20, 2008

Earned Income Tax Credits -- Keep More of the Money You Earned

Overview:

People generally want what is coming to them -- especially if it is money they earned.

The Earned Income Tax Credit (EITC) is a federal tax benefit for working people who earn low-to-moderate incomes. The program can offset some or all of the taxes workers must pay, and can help cover any federal tax workers still owe.

When the EITC exceeds the amount of taxes owed, it can even result in a tax refund to those who claim and qualify for the credit.

Originally approved by Congress in 1975, the legislation has become one of the largest anti-poverty programs in the country. According to estimates form the Internal Revenue Service, though, from 15 to 20 percent of individuals and households eligible for the tax credit in the past did not claim it on their returns.

In northwestern Pennsylvania, that means thousands of people did not claim millions of dollars that should have come to them -- money they earned.

EITC has no effect on certain welfare benefits, and should not be a reason to avoid the credit. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.

Basic Requirements:

In order to apply for EITC, you must meet the following requirements:

* Must have a valid Social Security Number

* You must have earned income from employment, or self-employment.

* Your filing status cannot be married, filing separately.

* You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.

* You cannot be a qualifying child of another person.

* If you do not have a qualifying child, you must:
* be age 25 but under 65 at the end of the year,
* live in the United States for more than half the year,
* not qualify as a dependent of another person

* You cannot claim foreign income (Forms 2555 or 2555-EZ)

Beware of RALs:

According to the latest IRS data, about 70 percent of EITC claims in the past were filed through commercial tax preparers, while less than two percent of recipients used Volunteer Income Tax Assistance (VITA) or other IRS-sponsored tax preparation programs.

Unfortunately, EITC claimants lose money when they use paid tax preparers coupled with "refund anticipation loans" (RALS) to file their federal returns.

Although paid tax preparers market RALs with the promise to "get you your refund quick," there is a high price to be paid for the service. The Brookings Institution estimated that the average cost for a tax filer who uses a tax return preparation service and RAL is over $200.

Because many low income families are less likely to have a bank account, these people pay addition fees to have an IRS check or loan check cashed.

VITA

VITA sites are now open across the nation through April 15. Electronic filing (having a return completed by computer to get a faster turnaround on a refund) is available in many VITA locations.

If a taxpayer files electronically, and has a bank account (checking or savings) where the refund can be deposited directly, the refund from the IRS will usually arrive within eight to ten days.

Check the Web


The IRS Website at http://www.irs.gov/ has some handy programs to help you file for EITC, including an online "assistant" that can help you determine if you are eligible for the tax credits.