It’s almost tax time again, and before you know it, you’ll be looking for every way you can find to cut your tax bill. All too often, though, many American taxpayers pass up available tax credits and deductions simply because they don’t realize they’re eligible. Moreover, those who are cynical about taxes often believe that all the best tax breaks are reserved for high-income taxpayers, leaving those in the lower income brackets without access to any provisions that will make a significant dent in their tax bills.
Fortunately, there’s a tax credit that’s designed for ordinary taxpayers to receive, with more than 27 million Americans receiving a total of more than $65 billion in 2013. The tax break is called the Earned Income Tax Credit, and it’s designed to help low- and middle-income Americans get some relief at tax time. Best of all, the credit can put more money into your pocket — even if you wouldn’t otherwise owe any income taxes at all.
The Basics of the Earned Income Tax Credit
The EITC is available to anyone who files a tax return, with varying credit amounts depending on your income level, your marital status and how many children you have. Small credits of up to about $500 are available for taxpayers without children, but families with children can get much larger credits that max out at more than $6,000 for those with three or more kids.
The EITC is designed to encourage workers to earn income, and so the credit amount gradually rises with wages and salaries until it hits the maximum amount. In 2014, earnings of $13,650 for those with two or more children, $9,720 for those with one child and $6,480 for those without children represent the point at which the EITC reaches its maximum amount. If your income goes above higher limits — for those with children, $17,830 for single filers and $23,260 for joint filers — then the maximum credit amount starts to decline gradually, as the EITC’s phase-out provisions take effect.
Source: Tax Policy Center.
In practical terms, the average EITC paid in 2013 was just over $2,400. Even better for taxpayers, the EITC is one of the only credits that is refundable, which means that even if you have zero tax liability before using the credit, you can get a check back from the government in the amount of any unused EITC amount available.
Getting the Word Out
Unfortunately, the Earned Income Tax Credit can be complicated to figure out, and so many eligible taxpayers don’t ever claim the credit to which they’re entitled. Moreover, mistakes in claiming the EITC are common, with a recent study from the IRS estimating that about a quarter of all EITC payments made last year were in error. When those mistakes force the IRS to reverse credits that taxpayers were counting on, it can be financially devastating to those living on limited incomes.
To encourage more people to take advantage of the Earned Income Tax Credit and to provide more useful information about it, the IRS has named Jan. 30, 2015 as EITC Awareness Day. By giving basic information on how the credit works as well as pointing taxpayers to free options to get tax preparation help and filing assistance, the IRS hopes that more people will take full advantage of the provision and get much-needed money in their pockets.
Moreover, if you didn’t know about the EITC until now, it’s not too late to go back and claim it for past tax years. If you qualify, you can amend your tax returns all the way back to 2011 to get the credit you were due. The IRS has plenty of basic information on how to claim and whether you qualify at its EITC website.
It’s rare enough for ordinary taxpayers to qualify for tax breaks that you have to make the most of any opportunities that come your way. The Earned Income Tax Credit is one of the most generous tax breaks available to many Americans, and it’s worth some effort to get your share of this $65 billion pie.
Motley Fool contributor Dan Caplinger isn’t eligible for the EITC but hopes that you are. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.