Earned Income Tax Credit Lifts Millions Out of Poverty: What is it?
With the election day here, refundable tax credits are top of mind for many Americans since they remain a big part of the debate over taxes and the IRS estimated that in 2009 the Earned Income Tax Credit lifted nearly $7 million people out of poverty. For 2009 -2012 the Earned Income Tax Credit was temporarily increased for working families with 3 or more dependents. Micheal Rubin explains what the Earned Income Tax Credit is and why you shouldn’t miss out on the valuable tax credit.
The Earned Income Tax Credit (EITC) is a crucial tax benefit available for low to moderate income earners. It is also very important to those with larger families and relatively low or moderate incomes. Here are the guidelines for this important tax credit.
For the 2012 tax year, your earned income, and your adjusted gross income (AGI, the sum total of all of your earnings less certain deductions) must be less than:
- $45,060 ($50,270 married filing jointly) with three or more qualifying children
- $41,952 ($47,162 married filing jointly) with two qualifying children
- $36,920 ($42,130 married filing jointly) with one qualifying child
- $13,980 ($19,190 married filing jointly) with no qualifying children
If you make more than the relevant amount above, you won’t qualify for the EITC. Also, if your investment income (like dividends and interest) exceeds $3,200, you’re not eligible for the EITC.
Earned Income Tax Credit Eligibility
In addition to earning less than the dollar amounts in the table above, you must have a valid Social Security Number, work for pay, and your filing status cannot be married filing separately in order to qualify for the EITC. There are other requirements including USA citizenship/resident alien status and limitations on investment and foreign income, but those are typically not issues for people eligible for the EITC.
Work for Pay
Unemployment income doesn’t help you qualify for the Earned Income Tax Credit. Neither does bank interest. In order to receive any money via the EITC, you must work. You can have a traditional job as an employee or you can be your own boss and earn money from self-employment. But one way or another, you’ve got to earn some money in order to qualify for the EITC.
As you can see above, the relevant income limits are much more generous if you take care of at least one qualifying child. Your child qualifies if he or she meets all of the following conditions:
- Has a valid Social Security Number
- Is your child (natural, adopted or foster), grandchild, sibling, step-sibling, half-sibling, niece, or nephew
- Younger than you and younger than 19, unless a student (in which case your child must be less than 24), or totally and permanently disabled (in which case there is no age limit)
- Lives with you in the United States for more than half of the year
- The child doesn’t file a joint tax return
Maximum Credit for 2012
While the precise amount of your credit will largely be determined by your filing status, number of children, and income, there are maximum payable Earned Income Tax Credit amounts. For 2012, these are as follows:
- $5,891 with three or more qualifying children
- $5,236 with two qualifying children
- $3,169 with one qualifying child
- $475 with no qualifying children
What is a Refundable Tax Credit
Note that unlike many other tax credits, the EITC is a refundable tax credit. This means that the EITC can not only eliminate any income tax liability you might have, but if your credit exceeds your tax liability, you can also receive a tax refund for that amount. It is for this reason that the EITC is one of the most important tax considerations.
You will be able to file your 2012 taxes soon so don’t miss out on this valuable tax credit. It just might mean an extra $2,000 or more in your pocket. Few other tax maneuvers can earn you that kind of cash! TurboTax ask you the appropriate questions and correctly calculates the Earned Income Tax Credit if you are eligible.