The 2017 tax season is about to begin, and already, taxpayers are looking for breaks they can use to reduce the amount they have to pay the IRS -- or to boost the size of their refund. Yet one of the most beneficial provisions of the tax laws is also one of the most overlooked. Moreover, because this provision is a credit rather than just a deduction, it can reduce your tax bill on a dollar-for-dollar basis if you qualify.
Let's look more closely at the Earned Income Tax Credit and whether you could use it to reap thousands of dollars in tax savings.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit is the most popular tax credit available to taxpayers. The purpose of the credit is to offer tax savings to workers with modest incomes, although the income limits on eligibility extend well into what most would consider middle-class incomes as well. The specific limitations depend on the number of qualifying children you have and your filing status, with the credit increasing for each child up to three children. For those claiming the credit on their 2016 returns, the it, and it also affects the maximum credit you can get. For those with three or more qualifying children, maximum credits of more than $6,250 are available to taxpayers.
A large number of taxpayers qualify to take the Earned Income Tax Credit. More than 28.5 million returns included claims for the Earned Income Tax Credit, according to the most recently available data from the IRS, and credits totaling more than $68 billion were paid to taxpayers as a result. That's the biggest payback of any credit the federal government offers, and it amounts to an average credit of $2,395 per return. Moreover, because it's a credit, taxpayers claiming that average credit get to save the entire $2,395 amount, rather than simply deducting that amount from their taxable income. Almost 20% of all taxpayers saved money by using the Earned Income Tax Credit.
The biggest benefit of the Earned Income Tax Credit
At first glance, you might think that the Earned Income Tax Credit wouldn't do most low-income taxpayers much good, because the total amount of the credit would often exceed a low-income family's total tax liability. However, the Earned Income Tax Credit is refundable. As a result, even if your tax owed is less than the credit, you can get the unused Earned Income Tax Credit amount as a check back from the IRS.
The real problem is that, surprisingly, many taxpayers who are eligible never claim the Earned Income Tax Credit. As in previous years, the IRS will have its EITC Awareness Day in late January, with the 2017 event happening on Friday, Jan. 27. The stated purpose of the event is to increase awareness of key tax credits, and in addition to the Earned Income Tax Credit, the IRS will also aim at informing people about the Child Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit for educational expenses.
Unfortunately, even those efforts aren't 100% effective. One in five eligible taxpayers don't claim the Earned Income Tax Credit. Given how important the EITC and other credits are in lifting people out of poverty, many find it unacceptable that those who are eligible don't always get the tax break they've earned through their work.
Don't miss out!
To make things easier, the IRS has many resources to help people figure out their credit eligibility. You always have the option of having the IRS calculate the credit for you, or using the appropriate worksheets, which are available at this IRS EITC website.
The Earned Income Tax Credit is one of the most important tax breaks that are available to working taxpayers. If you qualify, make sure you claim the credit to get every penny you're entitled to receive.