Don't overlook earned income tax credit: too many lose out

FOR LOW-INCOME workers, every dollar counts, which is one reason it's critical not to overlook the earned income tax credit this year when preparing tax returns.

Created in 1975, the federal credit has become one of the largest anti-poverty programs by reducing tax bills and, in some cases, giving refunds worth thousands of dollars. More than 21 million filers collected $37.7 billion under the credit last year, according to Internal Revenue Service figures.


Nevertheless, millions of workers eligible for the credit routinely don't claim it.

As many as 7 million households nationwide left more than $12 billion unclaimed, the Association of Community Organizations for Reform Now, or ACORN, estimated in a report last fall.


In Baltimore, more than 18,000 residents failed to collect about $29 million in federal and state earned income credits, concluded a separate report commissioned last summer by the Baltimore Creating Assets, Savings and Hope Campaign.

As the tax season kicks off, nonprofits and government agencies are renewing efforts to get the word out about the credit and to provide free tax preparation for low-income filers.

Additionally, the IRS announced last month a partnership with the Department of Housing and Urban Development to reach out to the 3 million low-income residents served by the thousands of housing authorities across the country.

This year, the income and credit limits have been bumped up to keep pace with inflation. Also new, Congress has made it easier for members of the military to maximize their tax credit this year. And the IRS has launched an online program that allows workers to quickly find out if they qualify for the credit.

The credit is on a sliding scale, and the size depends on income and the number of qualifying children. The maximum credit limits are $390 for filers with no children, $2,604 for those with one child and $4,300 for households with two or more kids.

A credit essentially reduces your tax bill dollar for dollar. So, if the credit is worth $1,000 and your tax bill is $1,000, you owe nothing. But the earned income tax credit goes one better. If the amount of the credit is higher than your tax bill, you get the difference as a refund.

So, do you qualify?

One easy way to find out is through an online program, called EITC Assistant, at It takes you through a series of questions on wages, children, investment income and filing status before determining whether you are eligible and the size of credit you might receive.


Basically, an individual must have adjusted gross income that's less than $11,490 if there are no children, $30,388 with one child and $34,458 with two or more children. Income limits for married joint filers are $1,000 higher.

Beginning this year, members of the military can include all or none of their combat pay when figuring their income for the credit, depending on which option provides the biggest credit.

Besides the federal credit, Maryland and more than a dozen other states also offer their own earned income credit. The Maryland credit, for example, is half the value of the federal credit received, and a portion of it may be refunded if the filer has at least one dependent.

Tax experts say one reason that so many eligible low-income filers fail to claim the credit is because they don't know about it.

"The rich people have accountants. The poor people don't have accountants," said Shera Williams of Baltimore, who previously claimed the credit after learning about it through word of mouth.

Williams, an ACORN member, says she now tells everyone she can about the credit and will be helping individuals file returns at one of the free tax preparation sites this year.


Even filers aware of the credit, however, are often put off from claiming it because of the rules, which are complex and prone to error. After the 1999 tax season, the Government Accounting Office placed the credit on its list of programs with a high risk of making incorrect payments.

"It's a very complicated credit. There are a lot of rules and it's easy to trip up," said David Williams, director of the Earned Income Tax Credit program at the IRS.

One of the common errors is incorrectly claiming children, who must meet certain age, residency and relationship criteria, Williams said.

Other frequent mistakes include missing or incorrect Social Security numbers, reporting the wrong income and submitting returns under the wrong filing status, the IRS said.

At least a third of erroneous credit payments, though, were the result of cheating, Williams said. Often it's done by unethical tax preparers who promise the credit to filers even if they don't qualify for it, he said.

If you're eligible for the credit, you also likely qualify for free tax assistance from 14,000 volunteer sites across the country. To find the nearest location, call the IRS at 800-829-1040. Also in Maryland, the Baltimore CASH Campaign posts its free tax sites online at United Way's First Call for Help at 800-492-0618 is compiling a list of free tax preparer sites throughout Maryland.


By filing returns electronically through one of these sites, taxpayers can receive refunds in seven to 10 days.

Some nonprofits say the goal of providing free tax services is to give low-income filers an alternative to a high-priced refund anticipation loan, which provides quick cash secured by a filer's expected refund.

Half of those taking out the loans receive the earned income tax credit, and they paid $1.59 billion in fees for the loan, tax preparation and electronic filing, the National Consumer Law Center and Consumer Federation of America reported in its annual survey last year.

The effective annualized rate of these loans for the 2004 filing season ranged from 70 percent for a $5,000 loan to more than 700 percent for a $200 loan, the groups estimated.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose