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Archive for Monday, January 26, 2004

How to avoid making mistakes on Earned Income Tax Credit

January 26, 2004

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If you're a parent, there are probably days that you want to scream (I know I do). You love your children, but goodness knows they can get on your nerves. But at least one time a year -- when it's time to file your tax return -- there are many parents grateful for their rugrats thanks to the Earned Income Tax Credit (EITC).

The EITC was created in 1975 as a way for working taxpayers with low incomes to shelter some of their earnings. For the 2002 tax year, more than 21 million taxpayers claimed $36 billion in EITC refunds.

But as valuable as this credit is, lots of folks are making mistakes when claiming it. So this year the Internal Revenue Service is increasing its efforts to explain the EITC and help people avoid common errors.

"The Earned Income Tax Credit law is very complicated," said David R. Williams, EITC director for the IRS. "Even some tax professionals find the law difficult. We understand it is complex and that is why we are making a major effort to help taxpayers understand the law."

By February, which is when the bulk of EITC claims are filed, Williams said that 14,000 volunteer walk-in sites will be open nationwide to help taxpayers with the credit. To find a site in your area call (800) 829-1040.

The IRS also is working with 180 community groups to urge qualified taxpayers to apply for the credit. The IRS has an electronic EITC tool kit for tax practitioners at www.irs.gov. Also, taxpayers can go to the IRS Web site and find Free File, the 2-year-old program that offers free online tax preparation and e-filing.

How often are people, including professional tax preparers, getting the EITC wrong?

A study based on 1999 income tax data estimated an erroneous payment rate at 27 percent to 31 percent. The rate is one of the highest of the federal benefits programs.

"The error rate is significant and it must be dealt with," Williams said.

Williams said EITC errors fall into four main categories:

  • Qualifying child. This applies to both the relationship and residency requirements. Besides a family's own sons and daughters, adopted children, grandchildren, stepchildren or foster children can be designated for the credit. A qualifying child also can be a sister, brother, stepsister, stepbrother or any of their descendants if you care for them as you would your own children. The child must have lived with you for more than half the year -- or more than 182.5 days. Jan. 1 through June 30 is not more than half the year.

"It's those kinds of issues that can trip up a taxpayer," Williams said.

  • Misstatement of income. Some EITC claimants may not accurately report their earned salaries. To be eligible for a full or partial credit, a taxpayer must have an adjusted gross income of less than $33,692 ($34,692 married filing jointly) and two or more children; $29,666 ($30,666 married filing jointly) and one child; and $11,230 ($12,230 married filing jointly) with no children. Don't be confused. People without children can qualify for the EITC -- if you are single or married, aged 25 to 65, have earned income, meet the income requirements and you're not someone else's dependent. An Earned Income Credit Table, which shows the credit amounts, is in the instruction booklet for Form 1040 and in IRS Publication 596. The credit maximum amounts are: Two or more children, $4,204; one child, $2,547; and no children, $382.
  • Filing status. If you are married filing separately you cannot claim the EITC. That's what the law says. To get around this requirement, some people try to change their filing status to single or head of household. For example, some married couples with joint income exceeding the EITC limit may try to file separately as singles so they qualify for the EITC. Can't do that.
  • Wrong Social Security number. Taxpayers occasionally either transpose Social Security numbers or use an inaccurate SSN.

This is a valuable credit so find out if you're eligible. But when it comes to this credit, don't cheat. Don't try to increase your EITC refund by creating fictitious qualifying children, lying about your income or listening to a crook who might encourage you to let someone else claim your children.

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