Every dollar counts, especially when you're trying to stretch each paycheck just to meet basic expenses. That's where the Earned Income Tax Credit (EITC) can be extremely helpful. Eligible workers can receive a refundable tax credit that could exceed $6,500.
Unlike a tax deduction, which lowers your taxable income, a tax credit reduces the taxes you owe dollar for dollar, leaving more money in your pocket. For instance, if you owe $1,000 in taxes and your tax credit is $500, you're tax bill is cut in half and you owe only $500. When a credit is refundable, like the EITC, it means you might get the benefit of this reduction, even if you don't owe any taxes.
Don't leave money on the table
One in five individuals eligible to receive the EITC do not claim it, the IRS notes in its annual EITC awareness information. Don't be one of them.
Veterans, Native Americans, people in rural communities and workers without children are most at risk of leaving money on the table, according to the IRS. And this money can be significant: the maximum credit for tax year 2018 (filed in 2019) is $6,557, for filers with three or more qualifying children, and $529 for eligible workers with no children.
Are you eligible for the EITC?
As its name implies, this credit is only for people who have earned income, meaning they work and get paid. Earned income includes earnings from working for someone else or earnings from being self-employed. But if you have investment income over a specified amount, or if you report having foreign earned income, you might not be eligible.
To find out whether you are eligible, use the online EITC Assistant at www.irs.gov, which walks you through a series of screens to determine whether you qualify and, if so, estimate your tax credit. The biggest factors are how much income you earned, the number of children you have and your tax filing status.
IRS rules—and tools—can be a bit intimidating. The good news is that trained community volunteers can help determine if you qualify for EITC and other refundable credits, and prepare your return. The service is free if you made $55,000 a year or less in 2018, and is available at more than 13,000 community volunteer tax assistance sites. Come prepared with a valid ID, income statements such as W2s and other information outlined in the IRS brochure Be Prepared To Get The EITC You Earned.
If you qualify for the Federal EITC, you may also be eligible for a similar credit from your state or local government. Twenty-five states, plus local municipalities including the District of Columbia and New York City, offer residents an earned income tax credit for 2018.
Here's one final tip. Even if you didn't qualify last year, it's worth checking again this year. About one third of the EITC eligible population changes every year, according to the IRS.