About Earned Income Tax Credit

The EITC is a valuable tax credit for low-to-moderate income workers and is considered to be the nation’s largest and most successful anti-poverty and work-incentive program. Annually, over $40 billion in EITC benefits are paid out to eligible taxpayers across the United States, which exceeds the Temporary Assistance for Need Families (TANF) and Food Stamp Programs. However, the EITC is different from many other assistance programs because the largest amount of EITC is NOT provided to the workers with the lowest income. The EITC is structured so that it increases as wages increase until it reaches a certain level at which point it plateaus while income continues to increase and then slowly decreases until the income limitation is reached. The graph below illustrates how the EITC worked during Tax Year 2008 for a married couple with two children:

• Eligible taxpayers who claim the EITC bring new federal dollars into the State which stimulates the local economy. In 2007, Hawai`i taxpayers received more than $155 Million in EITC benefits. If only 75% of last year’s EITC benefits was used to purchase goods and services, this generated more than $4.6 million in general excise taxes for the State.

• However, it is estimated that annually, Hawai`i workers fail to claim between $31,299,580 and $41,732,301 in EITC benefits. Therefore, every year, local businesses are losing out on millions of dollars in income and the State is losing out on millions of dollars in revenue that would be generated by the excise tax.

• Researchers have credited the EITC with raising labor force participation levels and helping families transition from welfare to work. For some workers, the EITC can represent a 30 to 40 percent increase in income and since the EITC is only available to those with EARNED income (workers), the EITC has proven to be an incentive for people to become employed and stay employed, thereby reducing their reliance on public welfare assistance.

• The EITC reduces poverty. According to the Center on Budget and Policy Priorities and the IRS, the EITC lifts approximately 4.4 million people, including 2.4 million children, out of poverty each year. Census data establishes that the EITC lifts more children out of poverty than any single program or category of programs.

• By reducing poverty, the EITC eases the financial difficulties encountered by the working poor and plays an important role in the stabilization of marriages and families.

The average taxpayer spends approximately $150 on tax preparation fees. During Tax Season 2007, 51,433 EITC-eligible Hawai`i taxpayers prepared and filed their tax returns through paid preparers. Accordingly, those taxpayers paid out $7,714,950 for tax preparation services – money that they could have used to purchase much needed goods and services for themselves and their families. Over the last four tax seasons, free tax assistance sites have saved taxpayers nearly $1,000,000 in tax preparation fees.

Paid preparers also extensively market Refund Anticipation Loans (RALs) to low-income taxpayers. RALs allow taxpayers who are expecting refunds to obtain their money quickly — but at a high price. Annualized interest rates on RALs have been estimated to range anywhere between 50 percent and 1300 percent. According to the National Taxpayer Advocate, 56 percent of RAL consumers also claim the EITC. In other words, the majority of RALs are being obtained by those who can least afford them. At the national level, the Brookings Institution found that an estimated $1.9 billion intended to assist low-income families via the EITC was received by commercial tax preparers and affiliated national banks to pay for tax assistance, electronic filing of returns, and high-cost refund anticipation loans in 2002.

Free tax assistance sites help taxpayers access and claim the tax credits to which they are entitled AND receive the full benefit of their refunds since there is no reduction of those refunds resulting from fees of any kind. Free tax assistance sites also help these taxpayers avoid predatory lending practices such as RALs.

Free tax assistance sites have also begun to serve as conduits to other services such as vocational training and financial literacy workshops.

Generally, anyone who earns less than $49,000 would be eligible for free tax assistance. However, some sites have a lower or higher cut-off point. Taxpayers should inquire at the site.

Basic eligibility requirements:

• You need to have earned income (whether you work for someone else or have your own business)
• You need a valid social security number allowing you to work
• If you are married, you must file jointly with your spouse.
• You must be a U.S. citizen or resident alien for the entire tax year and you must have lived in the US more than half of the year
• Any investment income must be $3,100 or less
• You cannot be a dependent or qualifying child of another person.
• If you have a child, the child must qualify by meeting relationship, age, and residency tests.
• A qualifying child cannot be used by more than one person to claim the EITC

For Tax Season 2010, a new tier of benefits has been added for families with three or more children. Income limits have also been increased.

You are:	and you earn LESS than:	then you may qualify for a credit or refund up to:
A married couple w/ 3 or more qualifying children	$48,279	$5,657
Unmarried w/ 3 or more qualifying children	$43,279	$5,657
A married couple w/2 qualifying child	$45,295	$5,028
Unmarried w/ 2 qualifying child	$40,295	$5,028
A married couple w/2 qualifying child	$40,463	$3,043
Unmarried w/ 2 qualifying child	$35,463	$3,043
A married couple w/no qualifying children	$18,440	$457
Unmarried w/ no qualifying children	$13,440	$457

Yes, the Child Tax Credit and additional Child Tax Credit for those who have ?qualifying children?. The Child Tax Credit has also been modified for Tax Year 2009. The income level at which a worker can receive the refundable portion of the Child Tax Credit has been reduced $3,000 in 2009 from $8,500 in 2008. It is estimated that this change will enable the CTC to reach 2.9 million additional children and will provide another 10 million children with a larger credit than they would have received under the previous rules.

Other credits available: Child and Dependent Care Expenses Credit, Credit for the Elderly or Disabled; Retirement Savings Contribution Credit, Credit For First-Time Homebuyers, American Opportunity Credit (new education benefit), increased Transportation Subsidy, Up to $2400 of tax-free Unemployment Benefits, Enery Efficiency and Renewable Energy Incentives, Health Coverage Tax Credit (limited to certain types of taxpayers).

You can only get the EITC if you file your taxes (or have someone file them for you). If you pay someone to do your taxes, it will probably cost you $150 or more. But through FISSP, there are free tax preparation sites throughout Hawai`i. Trained, professional volunteers at these sites will prepare your taxes at no cost to you. To find a free tax site near you, click here or call 2-1-1.

To find a list of free tax preparation sites throughout the state of Hawai`i, click here or call 2-1-1.

If you pay someone to do your taxes, it will probably cost you at least $150, and it could cost much more. If you go to a free tax preparation site, you will not have to pay anything.

You must bring:

• Copies of previous year's federal and state tax returns if available
• Any tax booklets or forms they might have received from the IRS or State
• Photo ID for taxpayer and spouse (if applicable)
• ORIGINAL Social Security cards for the filer, the spouse, and all children being claimed.
• Dates of birth for all of the above individuals.
• Proof of wage and earnings (such as W-2's, 1099's, etc)

Any other information about income and expenses (Social Security benefits, day care expenses, tuition expenses, unemployment compensation, worker’s compensation benefits, disability benefits)

All information relating to any new vehicles or homes that they purchased during 2009. If they are already a homeowner and an owner-occupant, they should bring with them proof of real estate taxes that they paid during 2009.

If they are self-employed and have less than $5,000 in expenses, they must bring all evidence relating to income earned, expenses paid, and general excise taxes or estimated taxes paid. Receipts and expenses must be sorted out. We cannot sort them out for the taxpayer.

Any interest and dividend statements from banks

Total amount of rent paid during the year and landlord’s name and tax ID# (in the event that the person is eligible for the low income renter's credit)

Total amount paid for day care and the day care providers’ tax identification number (which is the individuals’ social security number or the business' employer identification number)

Bank information if they want a direct deposit of any refund into their account.

Yes. If you are married and filing jointly, you and your spouse need to go to get your taxes done.

These are all names for loans that paid tax preparers offer their customers. If you get one of these loans, you can usually get your refund quicker, but these loans are very expensive. Usually the annual percentage rate (APR) is over 200%! That means you will lose a large part of your refund money if you take out one of these loans. If your refund is delayed for any reason, you will pay even more money for this loan. We recommend that you don't take out a loan like this. If you can wait a couple weeks after you file, you will get all of the money that you are supposed to get.

Yes. The National Community Tax Coalition has a website that will estimate how much money you could get from the EITC. (This is a guess, not a guarantee of how much money you will get.) Click here to go to their website.

The EITC is never counted as income for government programs. But some government programs have asset tests that limit how much money or property families can have (such in a money in a checking or savings account) and still be eligible. For most programs, the money from the Earned Income Tax Credit (EITC) is NOT counted as an asset during the month it was received and the following month. After that, the money could affect your eligibility for programs that have asset limits.

If you received the EITC last year, you can get some of next year's EITC money in each paycheck, instead of waiting until your refund at tax time. Ask your employer for a W-5 form so that you can file for the "Advanced EITC" (or AEITC). You can return the form to your employer at any time of the year and start getting a portion of your credit in each paycheck.For more information, click here to go the IRS site.

These types of income count as earned income for the EITC: Wages, salaries, self-employment earnings, tips, union strike benefits, and long-term disability benefits (if received before retirement). If you have nontaxable combat pay, you can decide if you want to count it as earned income. These types of income do not count as earned income for the EITC: MFIP, MSA, or GA benefits, worker's compensation, unemployment insurance benefits, alimony, child support, interest and dividends, Social Security and railroad retirement benefits, pensions and annuities, variable housing allowances for the military, and earnings for work done while in jail or prison.

You can usually get your federal refund within 5-10 days of filing if you have a bank account and use direct deposit. If you don't have a bank account, it will probably take 4-6 weeks to get your refund in a check.