Earned Income Tax Credit Rules and Regulations

Earned Income Tax Credit (EITC or EIC) is a federal tax credit available for moderate to low income working individuals and families, particularly those with children. An effort to combat poverty, this credit allows qualified taxpayers to keep more of their earned income and is intended as an alternative to welfare. An EITC can significantly reduce taxes for low and middle income families.

Who Qualifies for EITC?

In order to be eligible for EITC, applicants must file a federal tax return reporting taxable income. Sources of taxable income include:

� Income from employment

� Income from self-employment (specific criteria apply)

� Wages, salaries, and tips

� Union strike benefits

� Long-term disability benefits received before the minimum retirement age

There are additional criteria to be met if the EITC is claimed by a person or family with dependents.

Although taxpayers are required to only include taxable income, they can also choose to include non-taxable pay in earned income in Form W-2.

Non-taxable income includes:

� Most Social security benefits

� Alimony

� Interest and dividends

� Pay received as an inmate in a penal institution for the work conducted on the premises

� Retirement income

� Child support

Including non-taxable income on a tax return may increase or decrease a taxpayer's Earned Income Tax Credit.

Additional Qualifying Factors for Taxpayers

To qualify for Earned Income Tax Credit when filing their tax return, taxpayers need to consider the requirements:

1. You must be a U.S. citizen or a resident alien for the entire tax year

2. You must have a Social Security Number

3. Your income must not have come from any foreign accounts.

4. Your adjusted gross income and earned income must be below the specified limit

5. Your investment income must be less than the maximum allowed limit

Taxpayers with children need to consider whether the child qualifies for an EITC. The IRS considers four factors when making this determination:

� Relationship

� Age

� Residency

� Joint return

If a taxpayer does not have a qualifying child, but meets the qualifying factors for joint filing with their spouse, he or she can still claim EITC.

Benefits of EITC

An EITC allows middle to low income individuals and families to reduce their tax liability. If the qualifying couple have a qualifying child, it helps them to retain even more of their income. In addition, if the EITC is more than the taxes owed, the taxpayer qualifies for a refund.

Those that qualify for an EITC may also be eligible for similar credits in their state of residence. Twenty-two states offer state-specific EITCs, including Colorado, Delaware, Indiana, Connecticut, Illinois, Maryland, Nebraska, Massachusetts, Maine, Iowa, Indiana, New York, Ohio, North Carolina, Virginia, Vermont and New Jersey.

The IRS may offer additional benefits for specified periods of time. For example, the IRS introduced a new rule for refunds received in 2010 through 2012 where refunds received by low income filers were not counted as a source of income for federally funded public benefit programs. This meant that tax refunds received through EITC would not prevent a filer from being eligible for other programs like SNAP or Medicaid. When applying for EITC, taxpayers should check with their local benefit coordinator to see if there are similar local benefits offered.

The Earned Income Tax Credit is an opportunity for taxpayers to reduce their tax liability or to receive tax refunds. If low income taxpayers need assistance for appeals, audits, representation etc. they can make use of Low Income Taxpayer Clinics. These clinics provide free service to taxpayers who cannot afford to hire legal services to resolve tax issues.

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