Most people would be thrilled to get thousands deposited in their bank accounts. And yet, 20 percent of individuals eligible to receive that amount through the Earned Income Tax Credit (EITC) miss out on it.
The reason? Most people just don’t know about it. Tax time is approaching fast, so it’s important to make sure you understand what EITC is and how to claim it.
What is the Earned Income Tax Credit?
For many people, working full-time is not enough to pay for all the necessities and bills. For them, the EITC provides significant relief at tax time. Created in 1975, the EITC lowers families’ tax burdens and may actually provide a boost to their income.
Those who do not make a lot of money can get a decreased tax bill, pay no tax, or even get a large refund. You do not have to have children; you just have to work in the previous year to be eligible.
The EITC is a refundable tax credit, which means that it can reduce the amount you owe to the federal government to zero and the unused amount is refunded to you. But the only way to claim the credit is if you specifically file for it on your taxes.
How does the EITC benefit people?
Families can use the credit to boost their savings, pay down debt, or cover any other necessary expenses. For low- to moderate-income households, it’s a big help to meet their needs.
The average EITC recipient received $2,482. In 2016, 26 million people received $65.6 billion through EITC. Some states have similar credits offered to residents which are combinable with EITC, which means that families can get thousands back.
Additionally, the EITC is retroactive, meaning if you were eligible but did not file for it for the previous three years, you can claim it when you file your taxes for 2016.
The impact can be substantial. If a family with three or more children filed for the three years they missed, they could get over $18,000 back.
Yet only four out of five people eligible for the credit actually claim it. That discrepancy is often due to a lack of awareness. Individuals and families who work and are struggling to make ends meet often do not know they are eligible.
Who is eligible for Earned Income Tax Credit?
The qualifications for EITC are simple. To be eligible, you must be a US resident. You must have earned income during the previous tax year and either file as a single individual or married filing jointly.
Those who submit their taxes as married filing separately are not eligible. You need also to fall within the 2016 income limitations on the Earned Income Tax Credit table.
The maximum credits for the 2016 tax year are:
- $6,269 with three or more qualifying children
- $5,572 with two qualifying children
- $3,373 with one qualifying child
- $506 with no qualifying child
To be eligible, you must either have a qualifying child, or be between the ages of 25 and 65. If you’re a student, you can still qualify for EITC as long as no one can claim you as a dependent and you had some income. As long as you file independently and had a job while in college, you can get the credit.
How do I file for Earned Income Tax Credit?
You can only get the EITC if you submit a federal tax return and claim the credit.
If you do your taxes yourself and do not have children, you can claim the credit by filing a Form 1040EZ, 1040A, or 1040. But if you have children, you need to complete the Schedule EIC form with either the form 1040A or the Form 1040.
If you use tax preparation software like TurboTax, the program will prompt you with questions to see if you are eligible for the credit. Many people skip that section because they think they don’t qualify, but go through it to see if you’re eligible for at least some of the credit.
If you want to file your taxes and get EITC for free (and who doesn’t?), you can use Free File, free tax preparation software offered by the IRS. Anyone who makes under $62,000 can use the service without paying a fee.
If you think you need more assistance, don’t pay for tax professionals to help you. You can get free help when filing your taxes by going to a Volunteer Income Tax Assistance (VITA) site.
Staffed by trained professionals, VITA sites offer free, in-person tax filing help to people who make $54,000 or less. To find a location near you, check out the VITA website.
File for EITC
Tax time is just around the corner, and the EITC can help give you some wiggle room in your budget or save you money to make a lump sum payment on your student loans. This year, remember to file for EITC if you qualify and get this valuable tax credit.
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