Making sense of EITC…

As the tax filing season gets into full swing, you are likely to hear the acronym EITC more frequently. What is EITC? It stands for Earned Income Tax Credit. If you filed taxes last year, you may be familiar with this credit, but you should also know that there have been some changes due to all of the recent laws passed. In true tax fashion, the details of qualification can become a bit mind numbing when you sort through the IRS details. To prevent mental meltdowns I thought it might help to summarize the information in more user friendly language.

Before we get into the actual qualifying factors, let’s briefly review a few things you might want to keep in mind. First, if you qualify for an EITC you are very likely also eligible for free tax preparation services. Second, if you currently receive assistance from the government from programs such as Medicaid, Food Stamps and other subsidy programs, claiming the EITC should not impact your qualification for these programs. Third, if you claimed this credit and used the previously available advanced payment feature you are out of luck this year. Due to the changes in the laws this option is no longer available. You will still earn the credit for your tax filing, but will not be able to enjoy the advance on the qualifying credit total.

Who qualifies for the EITC? If you want to do a little pre-screening, you can check out the EITC Assistant tool on the IRS website. If you don’t have time to utilize this tool, check out the summary list below for a quick review of the basics. As always, check with your tax preparer or the IRS information sources for the full scope of information. This list is intended to provide an at a glance review only.

Before you can claim the EITC you MUST meet the qualification requirements and file a tax return. If you do not usually file a tax return due to your gross income levels you will need to start a new trend or pass on the credit. No filing = No credit!

• If you do not have earned income (a paycheck) for last year, you will not be able to claim this credit. It is an Earned Income Tax Credit. If you did not participate in the earning process, you cannot enjoy the credit benefits. Just like the Lotto, you have to play to win!
• Do you have a valid Social Security Number (SSN)? If yes, then you can continue on with your credit claim journey.
• Do you have investments (example: stocks) that earn you income? If these investments earned you $3101.00 or more throughout the year you will not qualify for this credit.
• Married? Congratulations! Be sure you file as a married couple and not separately or you will not qualify for this credit.
• The EITC is available to US Citizens and/or resident aliens only. If your citizenship status is anything other than these two categories, you may not qualify for this credit.
• If your parents are including you, their child, in their qualification for EITC you cannot claim the credit for yourself.
• Do you file Form 2555 or Form 2555-EZ? If yes, you can stop reading. You will not qualify for this credit.
• Your earned income and adjusted gross income (AGI) MUST meet the qualification limits based on your marriage and parenting credentials. (If you are married and how many kids you have…)
• Are you claiming a child on your taxes? To qualify for this credit they must meet certain criteria, as well. (see below)
• Were you at least 25 years of age at the end of 2010? Were you 60 years of age or younger at the end of 2010? If you answer, “yes”, to either of these questions you are meet the age criteria. If not, you may not qualify for the credit.
• Does someone claim you on their taxes as a dependant? If so, you will not qualify for this credit.
• Did you reside in the United States for at least half of the year? If yes, then you can continue in your qualification quest. If no, you are not likely to be eligible.

Income Qualification Ranges:

For the 2010 Tax Year, earned income and AGI must each be less than the following to qualify:

• If you have 3+ qualifying kids… $43,352 ($48,362 if you are married and filing jointly)
• If you have 2 qualifying kids… $40,363 ($45,373 if you are married and filing jointly)
• If you have 1 qualifying kid… $35,535 ($40,545 if you are married and filing jointly)
• If you have 0 qualifying kids… $13,460 ($18,470 if you are married and filing jointly)

Child Criteria for Credit Qualification:

The child must have lived with you in the US for more than 6 months of the year.

• You must be able to prove the relationship status of the child you are claiming. Qualifying relationship status includes your natural child (son or daughter), stepchild, foster child, adopted child, natural sibling (brother or sister), step-siblings, or a descendant of any of these (grandchild, etc).
• Was your child 19 years of age or younger at the end of 2010? If yes, you meet the age requirement.
• Was your child a full-time student under the age of 24 at the end of 2010? If yes, you meet the age requirement.
• Was your child permanently and totally disabled at anytime during 2010? If yes, you should meet the age requirement.
• Unless the child you are claiming is permanently and totally disabled, they must be younger in age than the person claiming them in order to qualify.
• Did your child file a joint return? If so, then they may not qualify for you to claim them.

EITC Maximum Tax credits for 2010:

• If you have 3+ qualifying kids… $5,666
• If you have 2 qualifying kids… $5,036
• If you have 1 qualifying kid… $3,050
• If you have 0 qualifying kids… $457

Common Errors to Watch For:

• If you are claiming a child in the qualification for this credit, be sure that they meet the necessary criteria.
• If you are legally married, filing as “single” or “head of household” will harm your chances of qualifying.
• Be sure the income your report is 100% accurate!
• Double check the SSN details for you and your children. Typo errors and/or missing information could cause trouble in qualifying for this credit.

Military Special Circumstances:

If you are an active member of the military and received Combat Zone Pay you may enjoy some flexibility in your AGI. As you prepare your taxes, review whether or not including your Combat Zone Pay helps to qualify you for a larger credit and/or if it pushes your income above the qualification threshold. If it pushes you past the threshold, you may have the option to not include it. If it helps you to receive a higher credit, you may want to include it. Just remember that the inclusion of Combat Zone Pay is an all or nothing option. As always, check with the IRS or your tax preparer for the full scope of impact on this detail.