Q: Tax Playa, I am an actor who doesn't earn much. Can I qualify for the earned income tax credit?
Kathleen, Pittsburgh PA
A: The earned income tax credit is like a reverse income tax. Not only does it cancel out any tax you might owe, it also is refundable. This means that if the credit calculated exceeds the tax you owe, you get money back...
For more on the earned income tax credit, read IRS Publication 596, Earned Income Credit (EIC).
The earned income tax credit (EITC) is intended to provide a cash supplement to poor or near-poor taxpayers. The original idea for the credit is from a combination of Milton Friedman's "reverse income tax," the "guaranteed minimum income" idea of Daniel Patrick Moynihan and the Nixon Administration, and an intent to shield poor Americans from the FICA tax.
The current credit has been expanded three times--once in 1986, again in 1993, and again in 2001. Additionally, it has been supplemented with a refundable child tax credit for poor and near-poor parents. As such, the original scope of the credit (refunding FICA) has been eclipsed many times over for households with children. Interestingly, for single households the original intent of the EITC remains--refunding some or all of FICA for the poor and near-poor.
Who is eligible for the credit? There are several threshold criteria that must be met:
- Adjusted Gross Income. These change with inflation every year. See the figures in the left column of the page to see where they are this year.
- You and your spouse must have a valid Social Security number, as should your children.
- You cannot exclude your foreign earned income under Sec. 911.
- Your filing status cannot be married filing separately.
- If you are a non-resident alien, you must file as married filing jointly. In any case, you must have lived in the U.S. for a majority of the year.
- You cannot have investment income of more than $2950 in 2008 (inflation adjusted). This includes interest, tax-exempt interest, dividends, qualified dividends, capital gains, royalties, rent from personal property, and passive activities like rental of real property, limited partnership income, income from estates and trusts, and S-corporation dividends.
- You must have earned income (wages, salaries, tips, self-employment income, optional non-taxable combat pay).
- You must be between the ages of 25 and 65. Younger and you are not really poor, just young. Older, and you are probably getting Social Security and Medicare.
- You cannot be the dependent of another person, or the qualifying child of another person.
If you have a qualifying child, the following conditions also apply:
- Your child must be related to you by blood or foster care
- Your child must be under age 19 (under age 24 if a full-time student), unless disabled.
- Your child must have lived with you in the U.S. for more than half the year.
- Your child cannot be married or claimed by anyone else under EITC (there are tie-breakers in case of a dispute).
The IRS provides helpful tables for you to figure your earned income credit. So long as you are eligible to claim it, the credit reduces any taxes you owe, and the remainder is refunded to you if you zero out your liability.
The IRS may suspend your ability to claim the EITC if you try to commit fraud with the EITC. The most-abused tactic is related families swapping children as dependents and qualifying children depending on the circumstances every tax year.
If you expect to receive the EITC and have a qualifying child, you can get advance EITC in each paycheck by filing a W-5 with your employer. This will allow you to have some of the cash throughout the year.