Are you getting the most out of your tax return? Maybe not. According to IRS data, roughly 1 in 5 taxpayers who are eligible for one of the biggest breaks out there never claim it.
The tax break in question is called the Earned Income Tax Credit, or EITC. Depending on the particulars of your tax situation, it can be worth up to $6,431. (More on that, below.)
Better yet, it’s a credit, which reduces your tax bill dollar for dollar. So if you owe $3,000 but qualify for a $1,000 credit, your tax liability goes down to $2,000. Deductions, which effectively lower your taxable income, are less valuable.
Here’s what you need to know to claim the EITC:
The EITC is designed to help low- to moderate-income taxpayers, particularly those with children, so you have to meet certain income requirements. (We'll break down the numbers in a minute.)
A big perk is that it's what’s called a refundable credit, meaning you'll get what you deserve even if it's more than what you owe. If you have a $1,500 tax bill and qualify for a $2,000 refundable credit, you get to pocket the $500 difference as a tax refund. Eligible taxpayers can even collect the EITC if they have no tax bill whatsoever.
That’s unusual. "A lot of tax credits are nonrefundable—you actually have to have a liability in order to claim it, and they don't give you the extra money if it doesn't wash out," says Mike D'Avolio, a certified public accountant and senior tax analyst with Intuit ProConnect Group.
It all comes down to your income, filing status and how many kids you have, so every case is different. The average EITC last year came in at around $2,488. The maximum credits available for tax year 2018 are:
Eligible taxpayers must be U.S. citizens who are at least age 25 but less than age 65, or who have children who meet certain eligibility requirements. You also must have earned income through employment. You can have investment earnings, but only if the total is less than $3,500. (There are also special rules for members of the military, members of the clergy, and taxpayers who are receiving disability benefits or have a qualifying child with a disability.)
You also have to be under certain income levels, according to the IRS:
- $49,194 for single, head of household or widowed individuals who have three or more qualifying children ($54,884 for married couples filing jointly)
- $45,802 if you have two qualifying children ($51,492 for married couples filing jointly)
- $40,320 if you have one qualifying child ($46,010 for married couples filing jointly)
- $15,270 if you don't have any qualifying children ($20,950 for married couples filing jointly)
The more children you have, the bigger the tax credit, so your children have to meet specific requirements. For starters, they must be younger than age 19 (or younger than 24, if a full-time student). There's no age limit for children who are permanently and totally disabled. You and the child must also live together in the U.S. for more than six months of the year.
Those are the biggies, but the IRS lists all the other nitty-gritty EITC requirements here.
"A lot of people may think they'll get audited if they take [the EITC],” says Lisa Greene-Lewis, a certified public accountant and tax expert for Turbo Tax. “But one thing to keep in mind is less than 1 percent of taxpayers are audited, and it's not necessarily those who take the Earned Income Tax Credit."
This is thanks in large part to the 2015 PATH Act, which makes it harder for fraudsters to rip off the EITC program. It grants the IRS the authority to delay issuing tax refunds on returns claiming this credit, essentially buying them time to take a deeper dive into these returns so that only those who truly qualify get approved. This year, the IRS began issuing refunds in late February for taxpayers claiming the EITC.
In case the IRS does come back to you with questions, having supporting documentation ready can help keep your return on track. D'Avolio says your income will already be on your W-2 or 1099 forms, but it's wise to gather your children's birth certificates and Social Security cards, as well as school enrollment forms for full-time students over age 19—basically, anything to support that you and your children do indeed qualify for the EITC.
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