A Credit With Too Few Takers

If a credit is refundable, it means that when the credit exceeds the tax you owe, you also get whatever amount of the credit is left over. Thus, if you have a $2,000 refundable credit and you owe $1,000, it not only wipes out your tax, but you get the leftover $1,000 back along with any tax you may have paid through withholding.

To qualify for the EITC, you must have "earned income," such as wages from a job; your "investment income," such as interest on savings accounts, cannot exceed $2,700; and your adjusted gross income cannot exceed certain limits:

? $11,750 if you're single and have no child, or $13,750 if you're married and filing jointly with your spouse and do not have a child.

? $31,030 if you are single and have one child, or $33,030 if you are married filing jointly and have one child.

? $35,263 if you are single and have more than one child, or $37,263 if you are married filing jointly and have more than one child.

That may sound simple enough, but it's not. Any "child" you claim must be a "qualifying child."

To be a qualifying child for purposes of the EITC, your child must pass a three-step test based on relationship, age and residence.

The child must be your child or grandchild, or your brother, sister, half brother or half sister, step-brother or step-sister, or one of their children, such as a niece or nephew. A foster child can qualify, but only if he or she was placed in your home by a court or authorized placement agency.

The child must also be younger than 19 at the end of 2005 for this tax season, or younger than 24 if a full-time student.

And the child must have lived with you, in this country, for more than half the year.

This isn't all, of course.

The child cannot be claimed by another person to qualify for the credit, which often creates problems for divorced couples. The parents are allowed to decide between themselves who can claim a child for tax purposes, but if they don't agree then the IRS has a flow chart to work out who gets priority.

And if you are the qualifying child of another person, you can't claim the EITC, even if the other person doesn't claim the credit. This can be a problem for three-generation families, where, say, the middle generation has income and could benefit from the credit but can't claim it because he or she is the grandparent's qualifying child.

By some estimates 25 percent of the low-income people eligible for the EITC don't claim it, and it's easy to understand why. But for people within the income limits above, the benefit could be worth thousands -- as much as $4,400 for a family with two children -- so it's worth searching out a free-assistance site or perhaps a commercial preparer. To locate a Volunteer Income Tax Assistance site, call the IRS at 800-829-1040.