Don’t overlook this $6,000 tax credit
(CNNMoney) — Many of the people who could use a little extra money the most are missing out on a tax credit worth up to nearly $6,000.
Aimed at helping the working poor, the Earned Income Tax Credit lifts millions of Americans out of poverty each year, yet one in five taxpayers eligible for the credit doesn’t end up claiming this extra windfall.
That’s a big loss, because the credit is one of the largest the IRS provides. The Tax Policy Center has found that it is the second largest cash assistance program for low-income families in the country — after the government’s food stamp program, which doled out nearly $72 billion in benefits last year.
By claiming the EITC, nearly 27 million taxpayers received about $59.5 billion from the credit in 2011, with refunds averaging $2,240, according to the IRS.
These payments helped an estimated 6.3 million people escape poverty in 2010, according to the most recent data from the Center on Budget and Policy Priorities. About half of those people were children. The government defines the poverty threshold as having an annual income of under about $11,000 for an individual and about $22,000 for a family of four.
“For people earning minimum wage, having enough money to get by can be really problematic,” said Michael Saltsman, a research fellow at the Employment Policy Institute. “This credit is not only reducing poverty, but stimulating employment, so there’s definitely an increased effort on the part of the government to let people know it’s out there.”
How it works: Since the EITC is refundable, claiming it lowers the total amount of taxes owed and can result in a refund if the amount of the credit exceeds the tax liability. This essentially allows low-income earners to hold on to more of the money they earned during the year instead of forcing them to give it all back to the government in the form of taxes, said Saltsman.
To claim the credit, the taxpayer must have a job and their income must fall under certain thresholds. The credit amount increases with the number of children claimed as dependents. For the 2011 tax year, single filers earning $13,660 or less who have no children are eligible for credits of up to $464, while married filers with income of less than $49,078 and single filers reporting income of under $43,998 who have three or more qualifying children are eligible for credits of up to $5,751.
Not only does the tax credit help put extra money in the pockets of low-income workers, but it also encourages people to at least find part-time jobs in order to qualify, said Saltsman.
Why are so many people missing out? Often, the people who qualify for the EITC have such low incomes that they aren’t required to file their taxes and have no idea that they could benefit from the credit, said Vincent Consenza, CPA at accounting firm Shanholt Glassman Klein Kramer.
In addition, people who get their hours cut or go from full-time to part-time or freelance positions don’t always realize when they have become eligible for the credit, since they have never claimed it before.
To help get the word out, the IRS is adding information to its website, sending out fliers and putting up posters.
To find out if you qualify for the EITC, the IRS website has a tool you can use where you enter basic information about your tax situationAlertMe