Earned income tax credit is often overlooked

NEW YORK (AP) ? One out of five taxpayers eligible for a key tax credit don’t claim it on their federal returns.

More than 26 million workers received earned income tax credits averaging $2,240 last year ? but roughly 6.5 million left potentially thousands of dollars on the table by skipping the credit.

Created in 1975, the EITC offers a refundable tax credit to workers with low or moderate income. When the EITC exceeds the amount of taxes owed, it results in a refund for those who qualify. Although the EITC is the federal government’s largest benefit program for workers, many don’t know they may claim it.

One reason is that there’s a large number of workers who’ve lost jobs in recent years. Many went back to work for lower pay or settled for part-time work. Taxpayers who didn’t qualify in the past because they earned too much, may easily overlook the EITC when their income falls.

To claim the EITC, taxpayers must earn wages during the year. There’s a cap on earnings in order to qualify. For 2011, the highest income limits are for households with three or more children. In that case, for single workers the cap is $43,998; the threshold rises to $49,078 for married couples filing joint returns.

Lower wage earners and those with more children get the largest tax credit, which top out this year at a maximum of $5,751 for workers with three or more children. A single person with no children may be eligible for a credit of up to $464.

The exact number of workers eligible for the EITC varies from year to year, the Internal Revenue Service says, because of life changes like marriage, births or adoptions and job loss.

Eligibility can also be affected by investments. Taxpayers who claim interest, dividends or capital gains of $3,150 or more last year don’t qualify. Married couples cannot avoid the capital gains disqualifier by filing separate returns, noted Vincent Cosenza, a certified public account with the New York firm Shanholt Glassman Klein Kramer & Co. Workers with foreign income are also ineligible for the credit.

Software like TurboTax or H&R Block At Home will alert taxpayers who prepare do-it-yourself returns that they are eligible. But for the decreasing number who file paper returns ? 22 percent of all filers last year ? there may be no reminder. Cosenza noted that this year, the worksheet taxpayers use to determine their credit must be filed along with the return. Tax prep software will automatically generate the form.

To find out if you’re eligible to claim the EITC or learn more about the credit, visit www.irs.gov/eitc .

Workers who qualify for the EITC also may be eligible for a similar credit on their state or local income tax returns. A total of 23 states have some form of EITC. The District of Columbia, New York City, San Francisco and Montgomery County, Maryland, also offer residents an earned income tax credit.