All you need to know about earned income tax credit

Earned income tax credit is a refundable tax credit given to people from low- to moderate-income families. Earned income tax credit, or EITC has been designed to reduce poverty and to encourage work by supplementing the wages of employees with low wages. EITC has lifted 5.8 million people out of poverty in 2016. But one in five taxpayers fails to collect this tax credit. The amount received under EITC is linked to the family’s number of children, filing status, and earned income. The amount also depends on the number of children that qualify. Childless couples who have an income below standard deduction can receive a small sum as EITC benefit. People without children who qualify can use tax forms 1040A or 1040 to claim EITC. The child can be a daughter, son, stepchild, or the person’s brother, sister, half sister, half brother, stepsister, stepbrother, or any descendent like niece, or nephew. Foster children also count if they have been officially placed with the family. People who are unmarried or divorced need to check to make sure that the ex-spouse/co-parent is not trying to claim their EITC. American taxpayers who earn modestly can claim EITC, and the filers need not be parents. Large amounts are usually made available for larger families. Grandparents who are working can also file for EITC. Workers tend to move in and out of this segment and eligibility, and it depends on their employment, parental, and marital status. In addition to the income cutoff, a filer’s investment income must be $3,500 or less. In 2018, over 25 million workers in the country received $63 billion, with the average amount being $2,488. The qualifying child has to be younger than 19 years on the last day of the year or a full-time student under the age of 24 on the last day of the filing year. Earning EITC To earn the EITC, you have to file taxes and earn less than the standard deduction of $12,000 for single and $24,000 for married couples filing jointly. You need to file the tax-free through Free File Alliance, especially if you need a refund. The tax software notifies you if you qualify for EITC. Earned income is defined as:

  • Wages, tips, commissions, and other taxable pay
  • Net earnings, if self-employed
  • Gross income received as an employee
  • Disability payment
  • Nontaxable combat pay

If someone has fraudulently filed for EITC when they not eligible, the person or couple will be disallowed for two years. It is up to the IRS to determine if the error is a reckless act or intentional disregard. Many families do not receive EITC, even if they are eligible. Billions of dollars remain unclaimed. The IRS indicates that around 15 to 25% of the population is entitled to EITC. Many non-profit organizations with the government have begun programs to increase the utilization of the EITC by raising awareness and helping families file the tax forms.

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