Tax

8 Myths About The Earned Income Tax Credit (EITC) At Tax Time

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We’ve made it through the first week of the tax filing season! With some tax returns are already on the way for processing, the Internal Revenue Service (IRS) is reminding taxpayers not to forget about the Earned Income Tax Credit (EITC). January 31 has been designated “EITC Awareness Day” – the 14th year of the awareness campaign that alerts millions of workers to this significant tax credit.

“The EITC is a vital tax credit that helps millions of hard-working working families around the nation,” said IRS Commissioner Chuck Rettig. “It’s critical that people review the credit to see if they qualify. Increasing awareness about the EITC is important, and the IRS is proud to support the ongoing efforts by partner groups across the country for sharing this critical information with taxpayers.”

The EITC is the federal government’s most substantial refundable federal income tax credit for low- to moderate-income workers. The credit has been around since 1975 and was intended to offset the burden of Social Security taxes —a chunk of your pay over and above federal income taxes—and to provide an incentive to work. The result? Taxpayers may be entitled to a refund even if they otherwise owe no tax.

There’s a lot of confusion surrounding the EITC. To help clear it up, here are eight myths about the EITC:

1. The EITC is a welfare system for those that don’t work. Please don’t share memes that say that people who do not work get EITC-related tax refunds at the expense of those who do work. That’s not true. To qualify for a refundable tax credit like an EITC (the ones that pay out even if you don’t pay in), you have to work. It’s literally in the name: Earned Income Tax Credit. Earned income typically includes wages, salary, tips, and net earnings from self-employment. It also includes union strike benefits and long-term disability benefits received prior to minimum retirement age and may also include nontaxable combat pay. Earned income does not include passive income, which means income that you aren’t actively generating on your own, like interest and dividends, pay that you receive while incarcerated, retirement income, Social Security, unemployment benefits, and alimony. It also doesn’t include child support (that’s tax neutral).

2. Only families with children qualify for the EITC. If you have earned income and a valid Social Security number, your filing status must be married filing jointly, head of household, qualifying widow(er), or single; you can’t claim the EITC if your filing status is married filing separated. You must also meet specific income criteria. Specifically, your tax year investment income must be $3,500 or less for the year; you must not file form 2555, Foreign Earned Income, or form 2555-EZ, Foreign Earned Income Exclusion; and you must have at least $1 in earned income (yes, that means that a self-employed person who claims a loss won’t qualify). You don’t have to have kids to qualify, but the amount of your tax credit is dependent on your income and the number of your qualifying children. A qualifying child for the EITC must meet all of the following criteria:…Read more>>

Source:-forbes