Your Taxes : Tax Credit Often Unused
Maria Monterosa’s financial deliverance came from an unusual source: the Internal Revenue Service. Last year, she was newly divorced and unable to collect child support from her out-of-work ex-husband.
After buying food and paying rent, Monterosa, who earns $12,000 a year working in a Washington delicatessen, didn’t have enough money to pay the day care bill. And no child care meant no job.
But, thanks to a sweeping outreach effort by several children’s rights groups, Monterosa found the earned income tax credit--the nation’s most generous and underutilized tax break. Uncle Sam sent her $1,200.
“It was fabulous,” says Monterosa, who has two daughters, ages 5 and 6. “I was able to pay for day care and even buy my daughters birthday presents this year. This credit is very important.”
Monterosa is among millions of Americans who have discovered the earned income tax credit, which can pay low-income parents up to $2,364--even if they paid no federal income tax.
The number of individuals applying for the earned income credit is expected to top 16 million this year, a 20% increase from 1992 levels, tax officials say. But some say the credit is still underutilized.
Roughly one in six Americans who can claim the credit don’t, says Nancy Duff Campbell, co-president of the National Women’s Law Center in Washington. The reasons are twofold: Some of the people who are due an earned income refund simply don’t file tax returns. Married couples who earn less than $10,900 aren’t required to file. Nor do single parents earning less than $7,800 have to file returns. Yet people in these income brackets are the targets of the EIC.
The other reason is simply confusion. Claiming the earned income credit is fairly complicated.
One sign of the widespread confusion is the number of people who improperly claim the credit, says Judith Golden, an IRS spokeswoman. Where some 13.5 million individuals claimed the credit on 1992 returns, only 9.7 million of those qualified, she says. Indeed, inaccurate claims are so common that merely claiming the EIC is now enough to single out your tax return for an audit. Returns including the EIC will be personally scrutinized this year instead of being automatically fed through the IRS computer, she adds.
The scrutiny should not deter anyone from legitimately claiming the credit, Golden notes.
How do you determine if you qualify for the EIC?
The test is three-pronged:
* You must have earned income--that’s wages, salaries, tips or income from self-employment.
* Your total income--including interest, dividends, contributions to 401(k) plans and the value of military housing and subsistence payments--must amount to less than $23,050 in 1993.
* You must have a “qualifying child,” who lives with you in the United States more than six months a year and for whom you provide support. To qualify, your child must either be under the age of 19 or a full-time student under the age of 24 or be permanently and totally disabled.
If you meet the criteria, you must file a regular tax form--the form 1040 or 1040A--along with a Schedule EIC. The EIC form is a little complicated because it’s broken into three parts. If you qualify, you get a “basic credit” just for having children and a low income. If you have an infant, you get another credit. If you pay health insurance premiums to cover your children, you get a third credit. You then add all those credits to come up with the total earned income credit amount.
Importantly, this credit is refundable. If it amounts to more than you owe, you get a tax refund--even if you didn’t pay a dime of federal income tax.
Example of Earned Income Credit
How do you claim the earned income credit?
Let’s follow a hypothetical single parent, Mary Jane, through the process. She has two children, ages 3 and 5, and earns $15,000 annually. She pays $500 a year for family health coverage. But her employer has not withheld any federal income tax from her paychecks.
Mary Jane files the 1040A form--it’s shorter and simpler than the 1040--noting her children’s names and Social Security numbers in section 6c. Her wages of $15,000 are written on lines 7, 16 and 17.
At line 19, she subtracts the value of the standard deduction for a head of household--$5,450--and, on line 21, deducts three $2,350 personal exemptions for herself and the children. Her taxable income, written on line 22, is $2,500. She looks up her tax in the tables and finds she owes $377 in federal income tax, which she notes on line 23.
Since she’s going to claim the earned income credit, she pulls out the Schedule EIC, where she repeats the personal information about herself and her children. On line 3 she writes in that she pays $500 for family health insurance premiums. On lines 4, 7 and 9 she repeats that her income is $15,000. She looks up the value of her basic credit on Table A and finds that she’s due a $1,118 “basic credit.”
She moves on to the second section where she claims a health insurance credit. Based on her income and the cost of her health insurance, she gets a credit of $344. But, since neither of her children are infants, she is not able to claim the third part of the credit for “a child born in 1993.”
She adds together the health care credit and the basic credit, and writes $1,462 on lines 28a and 28d.
Line 29 asks her to subtract line 28d--what she “paid in”--from line 23--her federal tax liability. The result: Mary Jane gets a $1,085 tax refund even though she paid no federal income tax.
About This Report
Today’s “Your Taxes” report, Pages D6 through D11, is a guide to preparing 1993 income tax returns. All stories were written by Kathy M. Kristof, The Times’ personal finance columnist.
