Many More May Qualify for EIC in 2009

By Robert Steere, Toolkit Staff Writer

One of the saddest events in the world of taxes occurs when a taxpayer misses out on a tax credit or deduction that would reduce tax payments or result in a refund simply because he or she doesn't know about it. Being uninformed is a huge disadvantage for American taxpayers in an environment where so many obscure credits and deductions are available to put money in your pocket.

The Earned Income Credit (the EIC) is one of those strange credits that can result in cash in the pocket for many taxpayers. As a refundable federal income tax credit for low to moderate income working individuals - employees and small business persons alike - the credit can be paid to you even if you owe no income tax. Many people have had a tough year in 2009, with job losses or weakened and reduced earnings. Therefore, many taxpayers may qualify for the EIC for the first time in 2009, and may not even be aware of it.

But you only receive the credit if you qualify for it and claim it on your tax return. To qualify, you must meet certain requirements and file a tax return, even if you did not earn enough money to be obligated to file a tax return. And, if you have qualifying children, you must complete Schedule EIC and attach it to your tax return in order to claim the credit.

The IRS and the Treasury Department have just marked EIC Awareness Day as their partners nationwide work to highlight the availability of this tax credit. The EIC is one of the federal government's largest benefit programs for working families and individuals. Last year, nearly 24 million people received $50 billion in benefits. The average credit was more than $2,000.

"As part of the economic recovery efforts, there have been important changes to expand EIC to benefit taxpayers," said IRS Commissioner Doug Shulman. "Today, more than ever, hard-working individuals and families can use a little extra help. EIC can make the lives of working people a little easier."

To qualify for the EIC, a person must have a social security number, must have earned income, must not have the filing status of 'married filing separately,' must generally be a U.S. citizen or resident alien for the full tax year, must not be a qualifying child for another taxpayer, must not claim a foreign income exclusion, and must not have more than $3,100 in unearned income (investment income). Income limitations also apply.

The income limitations that apply with respect to EIC qualification have been updated for the 2009 tax year (2010, too), allowing people with higher income or with more children to qualify for higher tax credit amounts. In order to qualify for the EIC for 2009, your earned income and adjusted gross income must each be less than:

• $43,279 ($48,279, if married filing jointly) if you have three or more children;
• $40,295 ($45,295, if married filing jointly) if you have two children;
• $35,463 ($40,463, if married filing jointly) if you have one child; or
• $13,440 ($18,440, if married filing jointly) if you have no children.

For purposes of these limitations, "earned income" generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as health insurance benefits and certain dependent care benefits and adoption benefits, is not earned income.

The maximum tax credit for 2009 depends on the number of children you have. If you have three children, your credit could be as high as $5,657; if two children, as high as $5,028; if one child, as high as $3,043; and if no children, $457 is the maximum credit. It is important to note that the amount of allowable credit is phased down as income increases and is phased out as your income exceeds the income limits listed above. To qualify for the maximum credit, earned income and adjusted gross income must be substantially less than the amounts shown above. To obtain the maximum credit, your adjusted gross income must be within the following ranges:

• from $12,600 to $16,450 ( to $21,450, if married filing jointly) if you have three or more children;
• from $12,600 to $16,450 ( to $21,450, if married filing jointly) if you have two children;
• from $9,000 to $16,450 ( to $21,450, if married filing jointly) if you have one child; or
• $6,000 to $7,500 (to $12,500, if married filing jointly) if you have no children.

To be considered in the calculation for the EIC, your child must meet the definition of a "qualifying child." This means that your child must generally meet relationship, age, residency and joint return tests. The relationship test requires the child to be your son, daughter, stepchild, adopted child, foster child, or a descendant of any of them (for example, your grandchild), or your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew). The age test requires that the child is under age 19, under age 24 and a full time student, or permanently and totally disabled at the end of the tax year. Generally, the residency test requires your child to have lived with you in the United States for more than half of the tax year. Finally, a qualifying child cannot file a joint return on his or her own behalf for the tax year (unless it was exclusively to claim a refund).

If you do not have any qualifying children, you may still qualify for the EIC if the following factors apply:

• you are at least 25 years old but under 65 years old;
• you cannot be claimed as a dependent of another person on their tax return;
• you cannot be a qualifying child of another person for purposes of the EIC; and
• you must have lived in the United States during more than half of the tax year.

Be careful as you determine whether you qualify for the EIC. Making errors can have serious consequences. If your claim for EIC for any year is denied or reduced for any reason other than a math or clerical error, you must attach a completed Form 8862 to your next tax return in order to claim the EIC again. (You must also qualify again in accordance with the rules for the next tax year to claim the EIC again.) However, if your EIC for any year is denied because of an IRS determination that you made an erroneous claim due to reckless or intentional disregard of the EIC rules, then you cannot claim the EIC for the next 2 years. If the IRS denial of your EIC claim is based on fraud, then you cannot claim the EIC for the next 10 years.

Posted February 2, 2010.