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Saturday, November 29, 2008

What is Earned Income Credit (EIC)?

By William Blake

Taxpayers are always very interested in the various tax credits that they can use to reduce their overall tax payments. The Earned Income Credit, commonly referred to as the EIC, is a tax credit which was established in an effort to help people who earn a low income to live as well as possible in their financial situation.

Set up in the year 1975, the concept behind the earned income credit was that since poor workers were having to pay so much in income taxes that they could never hope to move up the financial ladder they needed to be able to pay less taxes. By means of the EIC, low income families are given back a large amount of the money that has been deducted from their pay because of taxes throughout the year.

As time has passed, the amount that the earned income credit returns to individuals has gone up. Supporters of the EIC assert that the earned income credit does more for low income workers than simply increasing the minimum wage would. This is because people who are awarded the EIC use the money they get back to make purchases that boost their local economy.

There are three types of EIC eligible incomes. The first is money that is earned at a job. This money would include any wages earned by means of tips. If you are given a bonus by your employer, it can also be counted towards the earned income credit.

Self-employed earnings are also eligible for the earned income credit. If you own your own business but the money you earn with it is not enough to sufficiently care for your family, you may be able to receive the EIC. Any and everything your business earns can be counted.

Any money earned by one of your dependents can also be used to obtain the EIC. For example, the money that your teenage son or daughter makes while working summers or before and after school can be counted by you in order to get the earned income credit. This is true even if they have not earned enough to have to file for taxes themselves. The combined total of your income and your children's will be used to determine your EIC.

The money that your investments earn for you is counted as income by the IRS, as is money you collect because of unemployment. These sources of income may reduce your chances of getting the earned income credit. For example, if your investments earn you more than $2,800 in one year, you are disqualified from the EIC.

Each year thousands of dollars in earned income credit go unclaimed. Filers either don't know about the tax credit or they don't think that they will qualify. Not having to file a return doesn't mean that the tax credit doesn't apply to you. Even if your income is below the amount that which is required for filing a tax return, you may still qualify for the earned income credit. Don't sell yourself short. You could be passing up thousands of dollars that is yours under this tax credit.

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