This Explains $0 Federal Income Tax for Millions



The earned income tax credit (EITC) is a refundable credit against federal income taxes. Refundable means that you can receive the credit even if it is more than the taxes you owe. In 2013 (the most recent year for statistics), more than 29 million taxpayers out a total of 147.7 million individual filers c laimed the EITC. Of those claiming the credit, more than 25.5 million received refunds. In other words, rather than paying into the Treasury, they received funds from the Treasury. The EITC is one reason that millions of working Americans do not pay any federal income tax.

Basically, an Anti-Poverty Program

The EITC was introduced under President Ford in 1975 to help low-income working families manage increases in their payroll taxes and the rising prices for certain necessities (e.g., food, fuel) by giving them back a percentage of their earned income. Originally intended to be temporary, the EITC became permanent in 1978. Since then, there have been various changes that increase the maximum credit amount, allowing it to be claimed by a taxpayer with no qualifying child and providing a greater credit for those with three or more qualifying children. According to the Congressional Research Service, “The [earned income tax credit] has grown into the largest need-tested federal anti-poverty cash program.”

Don’t assume ineligibility. Just because you don’t think of yourself as being a low-income taxpayer, you may be eligible for the credit in a particular year. For example, if you are self-employed and have a bad year, your income may be low enough for you to qualify for the credit.

Understand how the credit works and whether it applies to you.

How It Works

Eligibility to claim the credit is based on having earned income from a job or self-employment. The amount of the credit is determined by various factors:

Earned income

Adjusted gross income (income subject to tax reduced by certain deductions such as alimony payments and IRA contributions) Investment income. It must be below a set amount ($3,400 for 2015 and 2016).

Marital status

Qualifying child. You can claim a credit without having a qualifying child. A large credit applies for one child, two children, or three or more children. Essentially, a qualifying child is someone for whom you can claim a dependency exemption. Someone who can be claimed as another taxpayer’s dependent cannot claim the EITC for him/herself.

The maximum credit amount is:


Number of qualifying children
2015
2016
None
$503
$506
One
$3,359
$3,373
Two
$5,548
$5,572
Three or more
$6,242
$6,269


You can see whether you are eligible for the credit and project how much you can receive by using the IRS’s EITC Assistant (in English or Spanish). This online tool walks you through eligibility questions to determine if you qualify and provides an estimate of the amount to which you are entitled.

Do’s and Don’ts

The EITC is too valuable to make mistakes. Here are some actions to take or avoid in order to maximize your credit. Do file a return.If you are eligible for the credit, you must file a return to claim it. The IRS does not automatically send a refund. Filing a return is necessary even when your income is below the threshold that otherwise requires you to file a return. Do let the IRS figure your credit amount. As you can see, there are a lot of factors that go into the computation of the credit. If you can’t figure it on your own, you can let the IRS do it for you by completing a portion of your return; the IRS will do the rest. You simply complete the return up to the line for the credit amount. On the line for the EITC, put “EIC” on the dotted line next to where you’d otherwise put a number (line 66a of Form 1040; line 42a of Form 1040A; line 8a of Form 1040EZ). If you have a qualifying child, complete Schedule EIC and attach it to the return.

Do elect to treat combat pay as taxable.This will increase the amount of the EITC. Of course, the election is not advisable if you are ineligible for the credit or it would result in higher income taxes.

Don’t ignore a letter from the IRS. You may receive a letter from the IRS suggesting that you are eligible to claim the EITC. Or, if you’ve already claimed it, you may receive an IRS letter asking for information to verify what you put on your return. The IRS has guidance on what to do if you receive a letter.

The Bottom Line

When you hear that millions of Americans don’t pay federal income tax, one reason is the earned income tax credit, which is, in effect, an anti-poverty program. Anyone eligible for this valuable tax credit should be sure to file for it. Check out IRS Publication 596. Also, find tools and information to help you better understand the credit and how to claim it at the IRS’s EITC Central.

Source: http://www.msn.com
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