Tax season hasn't even begun yet, but many Americans are already thinking about how they can cut their tax bill or get a bigger refund from the IRS this year. Many taxpayers can benefit from a key tax provision that can reduce your taxes substantially, and the best news is that instead of just being a deduction, it's a tax credit, which lets you reduce your taxes owed on a dollar-for-dollar basis. Yet many eligible taxpayers fail to claim this credit. Let's take a closer look at the Earned Income Tax Credit with an eye toward helping figure out whether you can take advantage of it.
The Earned Income Tax Credit and you
More Americans take the Earned Income Tax Credit than any other credit. The credit is largely aimed at those who have relatively low incomes, but its eligibility guidelines open the door to middle-income taxpayers as well. As you can see below, the size of your family determines the exact income limits for claiming the credit, and it also affects the maximum credit you can get. For those with three or more qualifying children, maximum credits of more than $6,000 are available to taxpayers.
As a result of those fairly broad eligibility guidelines, a large number of taxpayers claim the Earned Income Tax Credit. In the most recent year for which data is available, the IRS said that 28.8 million returns included claims for the Earned Income Tax Credit, and the IRS awarded more than $68 billion in credit amounts. That's more money than any other credit, and when you do the math, that amounts to a credit of around $2,362 per return. Unlike with a deduction, taxpayers claiming that average credit get to save the entire $2,362 amount rather than having their tax bracket apply. Nearly one out of every five taxpayers benefited from the Earned Income Tax Credit.
Have the IRS pay you
The Earned Income Tax Credit is unusual in that it's one of the relatively few credits that is refundable. What that means is that you can still receive your unused Earned Income Tax Credit amount even if you don't have enough tax liability to use it in full.
Every year, though, the IRS has trouble getting eligible taxpayers to claim the credit. To make sure as many people as possible take advantage of the credit, the IRS created EITC Awareness Day, which will be Jan. 29 this year. The 2016 version will mark the event's 10th anniversary. Yet even despite past efforts, the IRS estimates that only four in five eligible taxpayers claim and receive the credit, which is consistent with past figures showing a 20% to 25% rate of missing out among those eligible.
In addition, the IRS has addressed concerns that about the difficulty in doing calculations to receive the Earned Income Tax Credit by offering an election to have the IRS calculate the credit for them. By entering "EIC" on the dotted line next to the appropriate Earned Income Tax Credit box on your return (as shown above), you can elect to let someone else do the work, leaving you with the responsibility only to file in the first place.
If you want to join the millions of taxpayers who have received huge tax breaks from the federal government, don't forget about the Earned Income Tax Credit. For those who qualify, the money back can be extremely rewarding for those who have the knowledge to claim it.
The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.