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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Earned Income Tax Credit Gives Relief To Lower-Income Workers

Uncle Sam offers tax relief to low-income families, especially those with children, in the form of the Earned Income Credit (EIC). In 2002, reports the New Jersey Society of Certified Public Accountants (NJSCPA), several tax law changes make the EIC more valuable and easier to qualify for. That's because credit amounts and income-eligibility limits have been increased for inflation and benefits have been expanded for married families. Here are some of the frequently asked questions to help you determine if you meet the criteria and how you can claim the credit.

What Is The Earned Income Credit?
The EIC is a special refundable tax benefit for workers earning low to moderate incomes. Refundable means you not only get a credit to reduce your tax, but, if the credit exceeds your tax liability, you receive a refund from the Internal Revenue Service (IRS).

Who Qualifies For The Earned Income Credit?
This tax credit is called the "Earned Income Credit" because you must work and have earned income. Earned income includes wages, salaries, tips, and net earnings from self-employment. To qualify, you must be a U.S. citizen or resident alien for the entire year, have lived in the U.S. for more than half of the year, and have a valid Social Security number.

Are There Additional Requirements?
If you are married, your filing status cannot be "married, filing separately." You cannot be a qualifying child or be claimed as a dependent on someone else's return. Additionally, if you do not have a qualifying child, you must be at least age 25 but under age 65 at the end of the year in which you claim the credit.

What Are The Income Levels For 2002?
If you have no children, your adjusted gross income (AGI) or earned income, if greater, must be less than $11,060 ($12,060 if filing jointly). If you have one qualifying child, your income must be less than $29,201 ($30,201 for joint filers). With two or more qualifying children, the amount must be less than $33,178 ($34,178 for joint filers). The income limits rise each year to keep pace with inflation.

What About Investment Income?
To be eligible for the EIC, your investment income (interest, dividends, capital gains, etc.) must be $2,550 or less in 2002. Also, you cannot claim the EIC if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

What Is The Maximum Credit Available?
For 2002, the maximum credit amount is $2,506 for taxpayers with one qualifying child, and $4,140 for filers with two or more qualifying children. If there are no qualifying children, the maximum EIC is $376.

Who Is A Qualifying Child?
A qualifying child may be a son or daughter, adopted child, grandchild, stepchild, or foster child. The child must be (1) under age 19; (2) under age 24 and a full-time student; or (3) any age if the child is permanently disabled. The child, including a foster child, must have lived with you in your primary residence in the U.S. for more than half of the tax year. (Prior to 2002, a foster child had to live with you for a full year to qualify.) In addition, you must specify the name, age, and Social Security number of each qualifying child.

Do I Have To Wait Until I File My Return To Get The Credit?
If you have a qualifying child and expect to be eligible for the EIC this year, you can complete Form W-5, Earned Income Credit Advanced Payment Certificate, and submit it to your employer, who then gives you part of the basic credit in each paycheck. Whether you have one or more qualifying children, the maximum amount of advance payment is 60 percent of the maximum credit available to an individual with one qualifying child. You will receive any additional EIC credit when you file your tax return. You cannot receive the entire EIC as an advance payment.

How Do I Apply For The Earned Income Credit?
To claim the credit, attach Schedule EIC to your tax return. Most people can use the worksheet included in the instructions for Form 1040, Form 1040A or Form 1040EZ to compute the credit. (You can claim the EIC on Form 1040EZ only if you do not have qualifying children.) People with more complex returns must figure their credit using the worksheet in IRS Publication 596, Earned Income Credit (EIC). If you choose to have the IRS figure the credit for you, carefully follow the steps in the instructions for your form or refer to Publication 596.

CPAs Can Help
Unfortunately, the rules and regulations governing the EIC are complex. As a result, it's likely that many taxpayers are unaware of their eligibility. If you or someone you know is a lower-income worker, consulting with a CPA may bring a much needed tax break.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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