Do You Qualify for the Earned Income Tax Credit?
FS-2005-10, January 2005
The Earned Income Tax Credit (EITC) is a tax credit for people who work but do not earn high incomes. For eligible taxpayers, EITC is a valuable tool to lower their taxes or to claim a refund. The IRS wants all eligible taxpayers, but only those who are eligible, to claim the EITC. Many taxpayers who qualify for EITC may also be eligible for free tax preparation and electronic filing by participating tax professionals and volunteers. Taxpayers and tax professionals should review the rules before attempting to claim the EITC.
Do You Qualify for EITC?
To qualify, you must meet certain requirements and file a U.S. Individual Income Tax Return. As described below, some EITC rules apply to everyone. There are also special rules for people who have children and for those who do not.
Individuals and families must meet certain general requirements:
You must have earned income.
You must have a valid Social Security Number for yourself, your spouse (if filing jointly) and your qualifying child.
Investment income is limited to $2,650.
Your filing status cannot be “married filing separately”.
Generally, you must be a U.S. citizen or resident alien all year.
You cannot be a qualifying child of another person.
You cannot file Form 2555 or Form 2555-EZ (related to foreign earned income.)
Your income cannot exceed certain limitations:
For Tax Year 2004, you must have adjusted gross income of less than:
$34,458 ($35,458 if married filing jointly) with two or more qualifying children.
$30,338 ($31,338 if married filing jointly) with one qualifying child.
$11,490 ($12,490 if married filing jointly) with no qualifying children.
If you claim a child, they must meet three eligibility tests.
Residency Test — The child must have lived with you in the United States for more than half of 2004.
Relationship Test - The child must be your:
Son, daughter, stepchild or a descendant of any of them, or;
Sister, brother, stepsister, stepbrother or any of their descendents who you cared for as your own child, or;
A foster child who was placed with you by an authorized placement agency and who you cared for as your own child.
An adopted child placed with you for adoption by an authorized placement agency.
Age test - At the end of 2004, the child must have been under age 19, a full-time student under age 24 or any age if permanently and totally disabled at anytime during 2004. Your qualifying child cannot be used by more than one person to claim EITC. If a child meets the rules to be a qualifying child of more than one person, only one person can treat that child as a qualifying child and claim EITC.
If you don’t have a child, you must meet three additional tests.
At the end of 2004, you must have been at least age 25, but under age 65.
You cannot qualify as the dependent of another person.
You must have lived in the United States for more than half of 2004.
Credit Limits for 2004 Tax Year
Income and family size determine the amount of the EITC. The Earned Income Credit Table, which shows the credit amounts, is included in the Instruction booklet for Form 1040 and in Publication 596, Earned Income Credit.
For 2004, the maximum credit amounts are:
Two or more children — $4,300
One child — $2,604
No children — $390
Important Changes for Tax Year 2004
Combat Zone Pay
Beginning in Tax Year 2004, members of the military have the option to include their tax-exempt combat zone pay when computing their earned income for EITC. The combat pay remains exempt for federal taxes. However, families should be aware that they must include all of the combat pay or none of it. For example, if the inclusion of combat pay would push a taxpayer’s adjusted gross income above the EITC income limit, taxpayers should leave it out of their EITC calculations. If, however, the inclusion of combat pay would enable a taxpayer to obtain a higher refund, then combat pay should be included.
The EITC Assistant
If you are in doubt about your eligibility you or your tax preparer may use the new EITC Assistant on the IRS website. The EITC Assistant, available in English and Spanish, will help you determine your eligibility by answering a few simple questions.
Avoid Common Errors
You are responsible for the accuracy of your tax return. The rules for EITC can be complicated, so you should seek assistance if you are unsure of your eligibility.
Some common EITC errors are:
Claiming a child who is not your qualifying child.
Married taxpayers who incorrectly file as single or head of household
Income reporting errors
Missing or incorrect social security numbers
The IRS continues to work on ways to reduce this error rate. If you receive a letter from the IRS requesting additional information about your EITC, please reply immediately to avoid delaying your EITC refund. If you need assistance or who have questions, you should call the number included in the IRS letter.
Beware of Scams
A deliberate error can have lasting impact on your eligibility to claim EITC. Beware of
scams that claim to increase your EITC refund. Scams that create fictitious qualifying
children or inflate income levels to get the maximum EITC could leave you with a
penalty. If your EITC claim was reduced or denied after tax year 1996 for any reason
other than a mathematical or clerical error, you must file Form 8862, Information To
Claim Earned Income Credit After Disallowance, with your next return if you wish to
claim the credit.
How to Claim EITC
Publication 596, Earned Income Credit, explains the process. Download the publication or order it by calling 1-800-829-3676. Publication 596 also is available in Spanish. The instructions for Form 1040 can help you determine your eligibility. The instructions contain a worksheet and the earned income credit table to help you determine the amount of your credit. If you are claming the EITC with a qualifying child, you must complete Schedule EIC and attach it to your tax return. Schedule EIC provides IRS with information about your qualifying children, including their names, ages, SSNs, relationship to you and the amount of time they lived with you during the year.
How to Get Tax Help
You may find tax assistance from many sources. Taxpayers who qualify for EITC
also should visit IRS.gov to explore their options on Free File, the free tax preparation and electronic filing program provided by software companies.
Many e-file software providers and tax professionals also provide free services for low-income taxpayers. And, there are 14,000 volunteer sites nationwide where low-income taxpayers may get free tax assistance. Times and locations of these sites are publicized locally. The center closest to you also can be found by calling 1-800-829-1040. And, the IRS has more than 400 Taxpayer Assistance Centers throughout the nation. The IRS also will compute your credit for you. Just write EIC on the appropriate earned income credit line on your tax form and attach Schedule EIC if you have a qualifying child. The vast majority of EITC claimants allow a third-party to prepare their taxes. If you allow someone to prepare your taxes, make sure you seek out reputable tax professionals. Regardless of who completes your tax form, you are responsible for its accuracy.
EITC recipients should remember they can get faster access to their refund by using
direct deposit. If you use IRS e-file and direct deposit, you could have your refund half the time of a paper return.
Advance Earned Income Tax Credit
If you received advance EITC payments in 2004, you must file a tax return to report the payments. Your W-2 form will report your advance EITC amount. You cannot use a Form 1040-EZ to report advance payments.
The advance EITC payment program allows you to receive part of the credit through
your employer. If you would like to participate for 2005, you must work and receive
taxable wages. If you qualify for EITC and you have at least one qualifying child for
2005, give your employer a Form W-5, Earned Income Credit Advance Payment
Certificate, and your employer will include part of the credit regularly in your pay.
Publication 596, Earned Income Credit (PDF 373K)
EITC Assistant — Find out if you are eligible for the Earned Income Tax Credit.