10 Reasons why Workers Fail to Claim or Obtain the Earned Income Tax Credit
Each year, Hawaii workers fail to claim approximately $44 million in Earned Income Tax Credits. Below is a list of the top 10 reasons why some taxpayers miss out on this valuable tax credit.
1. Failure to file a federal tax return.
Some taxpayers do not file a federal tax return because their earnings are low and they are not required to file. However, even if a taxpayer is not required to file a return, it might be extremely beneficial to do so. Example: a married couple with two qualifying children and $17,000 in income are not required to file a federal return. However, if that couple did file and met all other EITC qualifications, they could receive $4,824 as a result of the EITC and additional funds as a result of another valuable credit – the Additional Child Tax Credit.
2. Failure to amend previously filed tax returns.
A taxpayer who was eligible for the EITC in prior tax years but failed to claim it can amend previously filed returns (up to 3 years) to take advantage of the credit.
3. Assuming that the EITC benefits only those who owe taxes.
Some tax credits only reduce or eliminate tax liability. The EITC is a refundable tax credit. This means that even if an EITC-eligible taxpayer owes no taxes, the taxpayer will receive the amount of the credit as a refund. If the taxpayer does owe taxes, the EITC will offset the amount of taxes owed and the remainder will be received as a refund.
4. Not understanding what constitutes earned income.
Earned income is money from a job or self-employment but it also includes union strike benefits, taxable long-term disability benefits received before the minimum retirement age, household employee income, and certain types of combat pay. Earned income does NOT include unemployment or workers’ compensation benefits, child support or alimony, pensions, or any wages earned while an inmate in a penal institution.
5. Believing that the EITC only applies to those who have children.
The EITC provides the greatest benefit to those who have children but is available to single or married couples without children. Taxpayers without children must be at least 25 years old and under age 65 and cannot be a dependent of another person.
6. Not understanding who can be considered a “qualifying child”.
The term “child” includes a stepchild, adopted child, legal foster child, brother, sister, stepbrother or stepsister, or “a descendent of any of them”, which would include nieces, nephews, and grandchildren. The child CANNOT be used by more than one person to claim the EITC. “Borrowing” children for the purpose of claiming the credit (or any other tax benefit) is NOT permitted.
To qualify, the child must have lived with the taxpayer in the United States for more than one-half of the taxable year, cannot be the qualifying child of someone else, must be under 19 - or under age 24 if a full-time student - or any age if permanently and totally disabled, must have a valid Social Security Number, and cannot be married.
7. Married taxpayers decide to file separate returns.
Married taxpayers must file a joint return in order to claim the EITC. Some taxpayers decide to file separately because their spouses have outstanding debt. However, it is possible for a married taxpayer to file jointly and benefit from tax credits such as the EITC and still be protected from their spouses’ debts.
8. Assuming that not qualifying for the EITC in one year means that the credit will never be available.
The income limitations for claiming the EITC has been increasing every year. In addition, changes in a taxpayer’s personal life – job loss, reduction of work hours, marriage, the birth of a child, adoption or assuming the responsibilities of raising someone else’s child – can make a previously ineligible taxpayer able to claim the credit.
9. Lack of proper documents and other information.
Failing to provide a tax preparer with all necessary documents and information can result in the taxpayer filing an incorrect return and a denial of EITC benefits. A taxpayer who claims the EITC recklessly cannot claim the credit for 2 tax years. If fraud is involved, the taxpayer cannot claim the credit for 10 years.
10. Believing that claiming the EITC requires the services of a paid professional.
Free tax assistance sites, such as those partnering with and coordinated by the Family and Individual Self-Sufficiency Program at HACBED, are staffed by trained and IRS-certified volunteers who are able to help workers file their federal and state tax returns and claim the EITC and any other tax credits to which they are entitled. The average taxpayer saves between $150 and $200 by using a free tax assistance site. Last tax season, free tax sites across the State saved Hawaii workers over $1.1 million in tax preparation fees.
