You’ve likely heard of the earned income credit (EIC), but very few people actually understand what it really is, other than something that may help them get a little more back from the IRS every year when they file their taxes. The earned income tax credit is a way to help low-income families and some middle-income households get a boost in their revenue when tax time comes around. Created in 1975, the idea behind the earned income tax credit was to lessen child poverty and welfare by giving something extra back to those who need it the most (those in lower income brackets) when tax time comes around. Additionally, there was hope that by getting a little extra back if they were earning money, those on welfare would be given a much needed boost to make the transition from taking their money from the welfare program to going back into the workforce.
There are many factors that go into a taxpayer qualifying for earned income tax credit. Since it was created to fight child poverty, it is mainly geared toward those raising children, whether they are single parents or families. The number of children in the home, marital status and income for the family all are taken into account when determining the amount of the credit. There are some cases where a single person without children can get the credit, but these are more restrictive.
Who gets the earned income tax credit will all depend on how the numbers crunch out on the tax forms at the end of the year. For the most part, it's dependent upon your adjusted gross income. If you are below federally-set limits, you may be able to claim the credit. However, many people believe that the word 'credit' implies that you can only get this money if you have had deductions taken from your income. Others believe they can only use the EIC if they owe the IRS money, and they can deduct it from that total. Both of these reasons are not necessarily the case. Regardless of your filing situation, if your adjusted gross income is low enough to allow you to qualify for the earned income tax credit, you should ask for it.
It is important to make sure, however, that you really do deserve the earned income tax credit before you take it. Some people claim the credit when they don’t really qualify, hoping that the government won't notice. While they may not notice it right away, if the numbers don't add up the way their system says that they should and you're caught in this fraudulent activity, you will be barred from taking the credit for the next ten years, even if you do qualify for it in those years to come.
As you prepare your taxes this year, do your research into whether you qualify for the earned income credit. For those just making ends meet, the money coming back from this tax break can be a major blessing.