CREDITS: EARNED INCOME CREDIT

EARNED INCOME CREDIT  The Earned Income Credit (EIC) is a refundable tax credit available to certain taxpayers who work but do not earn high incomes.  They can receive a refund even if they have no filing requirement, owe no tax, and had no income tax withheld.  Purpose: to reduce the tax burden and supplement the wages of working families whose earnings are less than certain maximums, depending on their filing status and number of qualifying children.

Eligibility  Taxpayers and all qualifying children must have SSNs.  Cannot file Married Filing Separately.  Must be US citizens or resident aliens all year.  Taxpayer cannot be qualifying child of another.  Taxpayer cannot have over $3,100 investment income.

Eligibility, cont’d.  Taxpayer must have earned income, and all income must be below limit.  What is “Earned Income” for EIC?  Wages, self-employment, etc.: Yes  Social security, pension, unemployment, alimony, etc.: No

Eligibility, cont’d. If taxpayer has no qualifying child:  At least one taxpayer on the return must be 25 but not 65 on Dec. 31.  Taxpayer cannot be a dependent or qualifying child of another person.  Taxpayer must have lived in the US more than half the year.

Eligibility, cont’d. If taxpayer has a qualifying child:  “Child” must be child or sibling, or descendent of these (step, half & foster are OK).  Child must be below 19 or student and below 24, and younger than taxpayer, or disabled.  Child must be unmarried, unless a dependent.  Child must live with taxpayer over half the year (i.e., the non-custodial parent cannot count child for EIC).  Child must not be used by anyone else for EIC purposes.

Entering the information  When entering dependent information, check the EIC box if there is any likelihood that the dependent qualifies the taxpayer for the EIC.  TaxWise will prompt you to complete the necessary forms.  If you think the taxpayer should qualify but TaxWise says he/she does not, check those forms VERY carefully.

Previously Denied EIC If an EIC claim was denied or reduced due to any reason other than a math or clerical error:  A taxpayer who was reckless or intentionally disregarded the EIC rules cannot claim the EIC for 2 tax years.  If the error was due to fraud, the taxpayer cannot claim the EIC for 10 tax years.

Previously Denied EIC  Taxpayers who have been denied the EIC have been officially notified of this.  If so, you must file Form 8862, Information to Claim Earned Income Credit After Disallowance, with the tax return.

Advance EIC Payments  This is FYI in case someone asks.  In previous years some taxpayers could opt to receive part of the projected EIC in their paychecks throughout the year.  This policy was discontinued effective in 2011, so AEIC payments should no longer appear on W-2s.