Will You Get the Earned Income Tax Credit This Year?

If You Forgot What The EITC Is...

...you're not alone! Every year taxpayers are confused about this tax credit and many who qualify don't even know it. First, the history. This tax credit has been around since the mid-1970s. Called EITC for short, the Earned Income Tax Credit is meant to be an incentive to work. In this case, the demotivating factor is the Social Security tax.

Here's how it works. Many of the low and moderate income people who work find it difficult to justify working when the taxes take out so much of each paycheck. A very low paycheck minus Social Security tax may total less than just going on welfare. Therefore, the EITC is meant to give those low income workers a refund come tax time- to offset the impact of Social Security taxes. Basically, the EITC helps nudge low-income workers a few steps up the ladder, income-wise, above welfare recipients. Therefore, it's an incentive to work. Sometimes, the credit is actually more than the taxes owed by a low income taxpayer. In that case, they get a tax refund from the IRS. Whatever the case, one must file a tax return to qualify for the Earned Income Tax Credit.

Find Out if You Qualify

It's already been said that one must file to qualify. But what else? First, you might have already guessed: you must have earned income. There are only two types of earned income: money you make working for someone or money you make by owning your own business. There are several types of earned income:

1. your paycheck
2. profit from your own business
3. long term disability if you're not yet retired'
4. benefits you receive as a result of a union strike
5. tips
6. any type of pay you earn as an employee

Limits for the Earned Income Tax Credit

The total amount of earned income from these sources must be less than $13,980 if you are single and have no children. This is for the 2012 tax year. As the number of your children goes up, so does the limit for qualifying for the EITC. If you are married filing jointly the limit is higher too, of course. That single taxpayer with no children will get a maximum of $475 credit on his or her tax return. Money you make by investing money is also figured into the equation. You cannot make more than $3,200 investment income if you want to qualify for this tax credit.

Here's What Doesn't Count as Earned Income

• Alimony you receive
• Social Security checks
• your retirement income
• interest and dividends
• unemployment benefits
• child support you receive

Rules about Qualifying Children

Each qualifying child you have increases your potential to receive more EITC. Here's what qualifies a child. The child must have a social security number and he or she can be adopted, foster, stepchild, and even a grandchild. Once a person is over 19, he or she is no longer considered a child as far as the EITC is concerned. However, if that person if a full time student, and younger than 24...still a child! Oh, and qualifying child must live with you for at least half the year.