Shari Blaich has a 4-year-old son and an income low enough to trigger one of the nation's most generous tax breaks: the earned income credit. And yet, until this year, Blaich had never taken the credit. She didn't even know it existed.
Now she's expecting a generous tax refund, thanks in large part to the EIC. And she's planning to amend previous years' returns to get back even more. The money is pivotal, she adds, because she lost her job last summer and has been surviving on state welfare payments ever since.
Blaich is among millions of low-income Americans who are just learning about the EIC--an 18-year-old tax break for the working poor--thanks to a variety of community outreach programs conducted by government agencies, companies, charitable organizations and shelters.
The outreach programs, which started in earnest about two years ago, are credited with boosting the number of individuals filing for the EIC to 13.5 million in the 1992 tax year from roughly 12.5 million the year before and 11.6 million in 1990. Blaich learned about the EIC through a statement stuffer that came with her monthly welfare check.
To say the earned income credit can be important to low-income families understates the case. The tax break can provide up to $2,211 in tax refunds--even to those who pay no income tax.
The biggest breaks are granted to those with income amounting to about $11,000 annually. So applying for the EIC gives these families what amounts to a 20% raise.
If you had wages of less than $22,370 in 1992 and have young children, you should investigate the earned income credit. You don't need to be a legal resident. You don't need to pay income taxes. All you need are wages and "qualifying" children.
The maximum credit for one child is $1,324. If you have two or more children, you could get as much as $1,384. If one of your children was born last year, you get an extra credit, worth up to $376. If you pay health insurance premiums for your family, you could get up to another $451.
How do you claim the credit? First you have to fill out the bulk of the standard tax form, Form 1040, or, if you don't itemize deductions, the simpler Form 1040A.
To illustrate, consider a hypothetical family, John and Jane Smith. John earns $15,000 annually. Jane stays home with their two children, Mary, age 2, and Tom, 8 months. They paid $300 in family health insurance premiums in 1992.
They have no itemized deductions, so they'll fill out the shorter Form 1040A. The top of the form asks for their names, address and Social Security numbers. On Line 7, they list John's $15,000 in wages.
Since the Smiths have no interest or dividend income and they didn't contribute to an IRA, they skip to Line 16. They repeat the $15,000 wage figure on both lines 16 and 17.
On Line 19, they put $6,000--the standard deduction for married people filing a joint return. They subtract that number from the $15,000 in wages to come up with $9,000. Then they multiply $2,300 by the number of personal exemptions claimed--four--and put the result, $9,200 on Line 21. Because Line 21 is greater than Line 20, they enter zero for taxable income on Line 22.
John's employer did not withhold any federal income tax from his wages. But, thanks to the earned income credit, the Smiths can still get a refund.
They turn to Schedule EIC, where they again fill in their children's names and Social Security numbers. On Line 3, they note the $300 in health insurance premiums paid, and list John's $15,000 in wages on Line 4. They had no non-taxable income, such as military housing or 401(k) contributions, so they skip to Line 7, where they repeat the $15,000 in wages.
They look up their credit on Table A in the 1040 booklet. Their basic credit for two children is $965. Line 9 asks for their adjusted gross income, which is the same as their earned income, $15,000. They repeat the $965 on Line 10.
In the second section, for the health insurance credit, they look on Table B for their credit. It amounts to $315. They then note the amount they paid for health insurance, $300, on Line 15. They put the smaller number, $300, on Line 16. That's their health insurance credit.
Finally, they get the added credit for having a child under the age of 1. Again they look up their income--this time on Table C. The young-child credit adds up to $262. They'll add that to their two other credits for total earned income credits of $1,527.
They'll note that total on Line 28c on Form 1040A and repeat it on 28d, as well as on lines 29 and 30.
Then all they have to do is sign the returns, send them in and wait for the IRS to send back a check.