How to Claim the 2008 Earned Income Tax Credit (EITC)

If you meet the income requirements, you may be eligible to claim the Earned Income Credit. There is one type of credit available to taxpayers with children and one for taxpayers without children. This article will give you the income limits, maximum credit amounts and general guidelines for the 2008 tax year (tax returns filed in 2009).

Difficulty: Moderate

Instructions

Things You'll Need:

• W-2 forms for all earned income
• Completed page 1 of Form 1040 or 1040A
• Completed Sch. C if self-employed
• Legal names & SS #s of all children under age 19 (or any age if disabled)
• IRS Pub. 596 or Form 1040 instructions for EIC credit tables
• Form EIC to file with your tax return if claiming the credit for children

1. General rules apply to all taxpayers wishing to claim the Earned Income Tax Credit (EITC). They include having earned income; U.S. citizenship or legal resident alien status; investment income of less than $2,950; you may not use Form 2555 or 2555-EZ (relating to foreign earned income); you may not file as married filing separately; you must have lived in the United States for more than half of 2008; and you must not qualify to be claimed as a dependent on anyone else’s tax return for that year.

2. A small EITC is available to taxpayers without children. To qualify for this credit, you must be at least 25 years old and no more than 65 years of age on December 31, 2008, and have total adjusted gross income of less than $12,880 if single ($15,880 if married filing jointly). The maximum credit you are eligible for is $438.

3. The EITC for taxpayers with children is a larger amount and you must meet a number of qualifications to claim it. We’ll cover the income requirements first. For taxpayers with one qualifying child, the maximum adjusted gross income on the tax return is $33,995 ($36,995 if married filing jointly). For taxpayers with two or more children, the maximum adjusted gross income is $38,646 ($41,646 if married filing jointly). If you meet these qualifications, the child or children must meet the requirements of two tests to qualify for the credit. The “relationship test” includes the following, according to IRS:
   • “The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. Your child includes:
   o A foster child who was placed with you by an authorized placement agency, or by judgment, decree, or other order of any court of competent jurisdiction
   o A legally adopted child or a child lawfully placed with you for legal adoption
   
   The “age test” includes the following:
   • At the end of 2008, 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 2008.

4. If all these tests are met in addition to the general guidelines, the maximum credit amounts are $2917 for one child or $4,824 for two or more children.

5. The EITC is what is called a “refundable credit,” which means you can collect it even if your tax for the year is $0. This credit is added to any other amounts you may receive for other refundable credits and your withholding tax refund. If you qualify for this credit with children, you probably also qualify for the Child Tax Credit (discussed in a future article).

6. If you qualify to claim the EITC on your 2008 tax return, you may opt to collect part of 2009’s credit in your regular paychecks instead of waiting all year to get it with your tax refund. If you choose to do this, you will need to fill out a W-5 form with your employer. The maximum advance payment you can receive in your paycheck for the year is $1,750. If you receive the advance credit in your paycheck, you MUST file a tax return in 2010. This allows the IRS to either pay the rest of the credit to you with your refund amount or (Heaven forbid) add it to your tax due amount if you do not qualify due to income limits or other reasons.

7. Little-understood truths about the EITC: In my tax practice I’ve discovered a few things that are often misunderstood or simply not known by most taxpayers about the Earned Income Credit. The most common one pertains to divorced parents, where the divorce decree has awarded the dependent(s) to the non-custodial parent. If the court awards the dependent exemption(s) to the non-custodial parent but the custodial parent otherwise qualifies to claim the EITC on the child(ren), it is perfectly legal for the custodial parent to claim the credit. The EITC cannot be claimed by a non-custodial parent, even if he or she meets the income guidelines. This is often the reason the custodial parent fights like crazy to keep the court from awarding the dependent exemption(s) to the other parent, but it doesn’t hold water. Attorneys and judges rarely are tax experts, so the dependent exemptions are often an issue when they don’t need to be. Custodial parents can feel free to give the tax exemption(s) to the non-custodial parent without fear of losing the EITC.
   
   Under no circumstances can more than one person claim the EITC for any given child. Only the parent who had physical custody for more than half the year can claim the EITC on that child, period.

8. Many taxpayers who qualify to claim the EITC will also qualify for free tax preparation services and electronic filing with participating tax professionals. They may also qualify for free electronic filing through any of the “Free File” vendors online. Call 1-800-906-9887 to find free tax help in your local area. For more information see my article, "How to File Your Taxes for Free or Cheaply."

Resources

• Free Tax Help Nationwide
• IRS' EITC Homepage
• EITC Assistant (IRS)
• More info on Free Tax Filing

[kimarkent]

on 2/27/2009 I love to read articles when you know what you're niche is...I turn everything over to our accountant, shoot maybe I should email this to him! excellent tips 5* and recommended