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Make less than $54K? Consider this underused tax break

Posted April 15

You work hard, so why not take some credit for it?

The Earned Income Tax Credit is one of the most overlooked tax credits around, according to many experts. But it is also one of the more generous.

The IRS estimates that 26 million people received about $65.6 billion under this tax credit last year. The average amount received was more than $2,400 but it can be worth more than $6,000. Yet one out of five workers who are eligible do not take advantage of it.

"It's huge. It can help people out of poverty," said Lisa Greene-Lewis, a CPA at TurboTax. "People are surprised by how big it is."

The reasons for missing out vary. The rules surrounding it are complex, people may not know to apply for it and eligibility may change year by year. The IRS suggests that anyone earning less than $54,000 a year look into their eligibility each tax season.

Here is a bit more information to help you understand this complex, but compelling, benefit.

WHO QUALIFIES

The credit is designed to benefit low to moderate-income workers but income thresholds vary on many factors.

To qualify, a taxpayer must have earned income from a job, self-employment or even some disability payments. They also must file federal taxes and meet a series of other eligibility requirements.

While you do not have to have children to qualify, you may get more back if you do. There are also special rules that apply to members of the military, members of the clergy, those receiving disability payments and people affected by disasters.

To determine if you qualify, use the EITC assistant on the IRS website at www.irs.gov/eitc . Most major tax software or tax preparers walk you through a series of questions to determine if you're eligible.

WHO OVERLOOKS IT

People often may not realize they qualify because they fall below the income threshold that requires them to pay taxes, so they never look into it, said Kathy Pickering, executive director of the Tax Institute at H&R Block. But you can claim the credit whether or not you owe taxes or even if you aren't required to file a return at all.

There are some special populations that might not realize they are eligible. The IRS says this includes people living in rural areas, the self-employed, disabled taxpayers, Native Americans, grandparents raising grandchildren and those whose earnings have recently declined, such as the recently divorced or unemployed.

People with disabilities are often concerned that a tax refund will affect their eligibility for public benefits, such as Medicaid or food stamps. But the law is clear that tax refunds, including refunds from tax credits such as the EITC, are not counted as income for purposes of determining eligibility for benefits.

Greene-Lewis also points out that qualifying children aren't always offspring. If you fully support and claim a dependent, such as a foster child, stepchild or even sibling, you may be able to claim them as a qualifying child under the rules.

WHAT ELSE

"Taxpayers' lives change constantly... just because they are not eligible in one year, they may be able to claim it in a following year," said Pickering, who estimates 5 to 6 million taxpayers missed out on the credit last year.

If you think you may have overlooked it, it may not be too late. Pickering reminds people that the IRS allows them to file or amend a return up to three years after the original due date, so they can easily have a tax professional review prior returns to deem eligibility and help file an amendment as needed.

Also, if you qualify for the Federal EITC, you may also be eligible for a similar credit from your state or local government. Twenty-five states, plus local municipalities including the District of Columbia and New York City, offer residents an earned income tax credit for 2016, according to the IRS.

One word of warning: there are some delays this year in the refund for those claiming the credit. A new law, designed to cut down on fraud, requires the IRS to hold refunds for those claiming the EITC and Additional Child Tax Credit until mid-February.

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