Source: IRS.
Every dollar you save in taxes is another dollar in your pocket to use as you want. With tax season ramping up into full gear, nearly every American will be on the lookout for ways to make sure they pay the IRS as little as they can. For many people, there's a popular tax credit that you can use to reduce your taxes, with a dollar-for-dollar reduction in tax liability that makes it much more valuable than a mere deduction. Yet because it can be complicated, many taxpayers neglect to take advantage of this key tax benefit. Let's take a closer look at this credit to see whether it's available to you.
Source: IRS.
Meet the Earned Income Tax Credit
The Earned Income Tax Credit is the most popular tax credit available to taxpayers, and although it's generally seen as primarily for low-income taxpayers, its scope actually extends well into middle-income levels. As you can see below, the exact income limits for the credit depend on how large a family you have, with those with three or more qualifying children having the highest income limits. Similarly, the maximum amount of the credit varies by family size as well, with credits of more than $6,000 available to those with three or more qualify children:
Source: IRS.
Because of those fairly high income limits, 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 27.8 million returns included claims for the Earned Income Tax Credit, and the IRS awarded more than $64.1 billion in credit amounts, making it the most costly credit for the government as well. When you run the numbers, that amounts to a credit of around $2,303 per return. Moreover, keep in mind that because it's a credit, taxpayers saved that entire $2,303, no matter what tax bracket they were in. With the IRS receiving roughly 145 million returns, nearly one out of every five taxpayers benefited from the Earned Income Tax Credit.
A portion of the form to claim the EITC. Source: IRS.
A novel way to boost your refund
One particularly nice thing about the Earned Income Tax Credit is that it's one of the credits on the books that are refundable. What that means is that even if you don't have any tax liability because your income is too low to owe taxes, you can still receive your unused Earned Income Tax Credit amount as a refund.
Yet surprisingly, even with so many Americans qualifying for the Earned Income Tax Credit, many eligible taxpayers never claim it. As recently as 2009, as many as 20% to 25% of eligible families didn't claim their credit, according to figures from the National EITC Outreach Partnership. Efforts to increase awareness of the Earned Income Tax Credit have likely reduced those figures somewhat, but the IRS still posts annual notices about how many people permanently lose unclaimed refunds because they never filed within the required three-year period.
One reason why some taxpayers haven't claimed the Earned Income Tax Credit is that doing the calculations can be tricky. Many taxpayers find even navigating the appropriate EITC table confusing, as it resembles a tax table but actually is geared toward calculating the credit.
Source: IRS.
Fortunately, the IRS has responded by giving taxpayers the option of having the credit calculated for them, simply by checking a box on their returns. All you have to do is file and be aware enough of the possibility of getting the credit that you include the appropriate form.
So if you're looking for a chance to put hundreds or even thousands of dollars back in your pocket at tax time, be sure to check into the Earned Income Tax Credit. If you're among the tens of millions of Americans who qualify, it could go a long way toward making your tax preparation for this year a lot more pleasant.
