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The Earned Income Tax Credit: Is it Worth the Effort?

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Dear Carrie: My daughter is a single mother who doesn't make a lot of money. I'm helping her file her tax return. I've heard something about an Earned Income Tax Credit, but I also hear that the qualifications are complicated. Is it worth pursuing for my daughter? — A Reader

Dear Reader: You're right that the Earned Income Tax Credit (EITC), specifically designed to help lower-income working families, can be complicated. There are income qualifications and filing qualifications as well as eligible child qualifications. But don't let that stop you. It's absolutely worth the effort to sort out the details for your daughter.

According to the IRS, over 26 million people nationwide received nearly $59 billion in EITC dollars in 2009. If she's eligible this year, it could mean a significant amount of money in her pocket.

The best resource for understanding the requirements is probably the IRS Earned Income Tax Credit Assistant at www.IRS.gov. By answering a few questions and providing some basic income information, you can determine if your daughter qualifies. But before you go online, it's a good idea to first understand some of the basics.

WHAT THE EITC IS

The EITC is a refundable credit for people who work but don't earn high incomes (generally speaking, less than $50,000 a year). The important distinction here is that unlike most other credits, the EITC is refundable — meaning that not only could your daughter's tax bill be reduced, but she could also actually receive money back.

WHO IS ELIGIBLE

Three factors will determine your daughter's eligibility: her earned income, which includes wages, tips and self-employment income; her adjusted gross income (AGI), which includes earned income plus income from other sources, such as investments (investment income can be no more than $3,100); and the number of qualifying children she has.

Earned income and AGI for 2010 must each be less than:

— $43,352 ($48,362 married filing jointly) with three or more qualifying children

— $40,363 ($45,373 married filing jointly) with two qualifying children

— $35,535 ($40,545 married filing jointly) with one qualifying child

— $13,460 ($18,470 married filing jointly) with no qualifying children

Another consideration is filing status.

Married couples must file jointly to claim the credit. If your daughter is unmarried and filing as a single taxpayer, there's no problem. If she's married, but her husband didn't live in her home for the past six months, she could possibly file as head of household and still claim the credit.

HOW THE CHILDREN QUALIFY

So far, that seems reasonably clear. But the rules become a bit more complicated when it comes to defining a qualifying child for the EITC. In most cases to qualify, a child must have a valid Social Security number and be:

— Younger than 19 (24 if your child is a full-time student; no age limit for a permanently disabled child).

— The taxpayer's child by birth or adoption, or a stepchild or grandchild. Siblings and children of siblings (nieces, nephews) may also be considered, as well as foster children with certain conditions.

— A member of the taxpayer's U.S. household for more than half the year.

You don't mention how many children your daughter has or the custody arrangement. If her children live with her for more than six months of the year, her situation may be quite straightforward. But if she and the children's father share custody and there's the possibility that they could each claim the children, they will have to decide who will claim them. In a situation like this with two children, the parents could decide to each claim one child.

HOW MUCH YOU CAN CLAIM

If you're already thinking this isn't worth it, think again — because the amount your daughter may be able to claim is significant. Depending on the amount of earned and adjusted gross incomes, qualifying taxpayers filing returns in 2010 can claim a credit for as much as:

— $5,666 with three or more qualifying children

— $5,036 with two qualifying children

— $3,050 with one qualifying child

— $457 with no qualifying children

Plus, many states offer residents an earned income tax credit, which increases the benefit. So by all means, it's worth your and your daughter's time to find out if she qualifies. She's lucky to have your help!

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2011 CHARLES SCHWAB & CO. INC. MEMBER SIPC

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