An important tax credit that might not be on your radar screen

Michelle Singletary
Washington Post Staff Writer
Thursday, February 4, 2010

For millions of Americans filing their 2009 tax returns, things could be vastly different this year.

The recession and the high unemployment rate have affected the tax situations for many people. As such, it's important this year that you research the tax deductions or credits you now may be eligible to receive.

For example, you may have previously earned too much to qualify for the earned income tax credit (EITC), which was created to help those who work but have modest incomes. Last year, nearly 24 million people received $50 billion in EITC benefits, the IRS reports, with an average credit of more than $2,000. The EITC is one of the federal government's largest anti-poverty programs.

Unfortunately, many more people now fall into this category. If this applies to you, don't overlook the EITC, which is a refundable credit -- meaning you can get money back even if you owe no tax or the credit is more than the amount of tax owed.

"The value of the credit is larger than ever before, particularly for families with three or more children," said David Williams, chief of electronic tax administration at the IRS. "Because you were earning more, this credit may not be on your radar screen."

Historically, one out of four eligible taxpayers fails to claim the EITC, which is why the IRS is again pushing to get the information out, Williams said. Typically, people who fail to claim the EITC include those whose earned income falls below the threshold required to file a tax return, grandparents raising grandchildren or people with disabilities. You have to file a tax return and specifically claim the credit to get it.

Eligibility for the EITC is determined in part by how much you earn and the size of your family, specifically whether you have qualifying children in your household. For tax years 2009 and 2010, the American Recovery and Reinvestment Act included a temporary increase for taxpayers with three or more qualifying children. The maximum EITC for this new category is $5,657. A qualifying child has to meet four tests -- relationship, residency, age, and whether he or she filed a joint tax return.

If you have a qualifying child, you get more money. But don't count yourself out if you're single. Childless singles and couples may be eligible for the credit, albeit for lesser amounts.

To qualify for the EITC, your adjusted gross income and earned income (it has to be earned) must each be less than $43,279 ($48,279 if married filing jointly) if you have three or more qualifying children. The limit is $40,295 ($45,295 married filing jointly) with two children; $35,463 ($40,463 married filing jointly) with one; and $13,440 ($18,440 married filing jointly) if not claiming any children.

If you meet the earned-income threshold, the maximum credit you can claim for tax year 2009 is $5,657 with three or more qualifying children; $5,028 with two; $3,043 with one; and $457 with none.

If you take the EITC, make sure you do it right. Because this is a valuable credit, there's also a fair amount of cheating, the IRS says.

"We do see a significant amount of fraud," Williams said.

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