Monday, March 5, 2012

Earned Income Tax Credit Increases Your Tax Refund


Earned Income Tax Credit, more commonly referred to as EITC or EIC, increases your income tax refund. If you file as single taxpayer or are head of a household, with one or more dependents, and earn a low to moderate amount of gross income during a tax year, you are eligible for this tax credit. Unlike income adjustments or deductions that change the amount of your gross income, a refundable tax credit increases your tax refund literally dollar for dollar. EITC, created through Congressional legislation in 1975, has grown into a significant reporting function in our US income tax system. Taxpayer information supporting an EITC claim has grown more complex and onerous over the years. This tax credit even has its own Internet web page at EITC Central. This resource, separate from the IRS website, provides eligible taxpayers and those who prepare tax returns important help following the rules and regulations (collectively called due diligence) in reporting eligibility information associated with this single tax credit. The requirements are documented in IRS Publication 596, Earned Income Credit. If you are eligible for EITC, you need to understand the growing set of rules imposed by tax authorities and follow them carefully to insure receiving your full tax entitlement.
Earned Income Tax Credit eligibility factors
EITC is based on income you earn. According to the Internal Revenue Service, earned income comes from a person, company, or agency you work for or from a business activity you operate or own. Wages, salary, or compensation, are all considered taxable income and are combined in order to determine the amount of the earned income tax credit. This government credit is a generous incentive to low to moderate income earners. Maximum gross income limits pertaining to eligibility are however imposed. Taxpayers require a valid Social Security number and must be either a US citizen, resident alien or a nonresident alien filing jointly with a US citizen. You cannot have any source of foreign income nor can you have unearned sources of income like savings account interest or stock dividends that exceed specific dollar limits. These limits can change from year to year. It is best to review current EITC income limits, maximum EITC amounts, and related tax credits like child tax credit (especially if you file Head of Household) on the official IRS website, irs.gov.
Earned income and unearned sources of income cannot exceed specific EITC eligibility dollar limits.
Income tax filing status is also a factor. If you are legally married as of December 31 of a tax year and claim the earned income tax credit, you cannot file an income tax return as Married Filing Separate (MFS). In addition, you can not be considered or file with someone considered a qualified child (QC) of some other person. If you file as Head of Household and claim one or more dependents, there are eligibility "tests" regarding age, relationship, and residency of these dependents during the tax year. These eligibility factors are an important part of your EITC claim in the 2011 tax year. Another valuable resource is IRS Pub 501, Exemptions, Standard Deduction, and Filing Information, which has the most current source of IRS rules that relate to filing status and dependency for the current tax year.
An Earned Income Credit checklist
You must provide sufficient documentation to answer EITC eligibility questions. This tax credit is calculated on how much earned income you report on your individual income tax return, your filing status for the tax year, and the number of dependents you support. Both you, as an eligible tax payer, and your tax preparer, are responsible for fulfilling all the information requirements when completing your individual income tax return. In fact, you can find IRS Form 8867, Paid Preparer's Earned Income Credit Checklist, on the official IRS website. It includes specific questions that must be answered when completing your eligibility information. Failure to meet any of these requirements will result in significant financial and/or tax-related consequences to both you and the person preparing your income tax return.
Tax incentives like the Earned Income Tax Credit are ways government agencies offer incentives to those who work but, despite their best efforts, earn low to moderate amounts of money. The EITC helps, for example, hardworking single parents responsible for others who depend on them for support. This tax-free money added directly to your income tax refund boosts not only your personal standard of living but, in fact, the entire economy. The significant size of this government-funded entitlement however has brought about a complex set of rules and regulations. Seek professional tax advice especially when filing an income tax return. An EITC checklist covering specific eligibility factors will help you, and the person who prepares your income tax return, remain in compliance with changing tax definitions and specific rules of due diligence documenting your eligibility for this valuable earned income tax credit. For annotated citations, please visit one of my tax-related blogs.


Article Source: http://EzineArticles.com/6832455

No comments:

Post a Comment