Over 27 million citizens claimed over $67 billion in Earned Income Credit in the 2015 tax year alone. Of that number it is estimated that up to 25% were incorrect or fraudulent claims. As a result, the IRS has gotten VERY serious about putting systems in place to discourage and punish frivolous, fraudulent or incorrectly calculated claims to the credit. I 100% encourage all eligible claimants to request their credits on their tax returns but do be aware, the IRS is looking to make sure you are entitled to it. So, as we start rolling into the new tax season here are some of the most important (and often missed or misused) eligibility requirements so you can be sure you don’t step into the EITC audit trap:
- Who is an eligible Qualifying Child – You don’t need a child to qualify but the credit is substantially higher for those with qualifying children. The rule for claiming a child as a qualifying child for purposes of the earned income credit requires that:
- Meets the relationship test by being related to the taxpayer
- Meets the age test by being –
- younger than age 19 (24 if a student) and younger than the taxpayer (or spouse if filing jointly), or
- permanently and totally disabled at any time during the tax year, regardless of age ;
- Meets the residency test by having lived with the taxpayer in the United States—i.e. one of the 50 states or the District of Columbia only (NOT including Puerto Rico or other US Territories)—for more than half the year; and
- Meets the joint return test by not having filed a joint tax return for the tax year
- Special rules apply if the child qualifies as a dependent for more than one person
It sounds simple, right? But families in the US are not so homogeneous, and the credit is possibly available to step parents and grandparents if all the conditions are met so be sure to talk this through thoroughly with your tax preparer.
2. Filing status – Only one filing status is not allowed to claim the EITC, Married Filing Separately. In the attempt to qualify for the credit, people are often caught claiming the incorrect filing status of Single or Head of Household. For purposes of the EITC, here are the filing status requirements:
Single Filing Status
You may claim a filing status of single only if you are unmarried meaning
- Had never been married;
- Was legally separated according to applicable state law under a divorce or separate maintenance decree at the end of the year (if a divorce was not final at the end of the year, the client is considered married); or
- Was widowed before the beginning of the tax year and did not remarry before the end of the year.
Head of Household Filing Status
The ability to file as Head of Household is generally limited to unmarried individuals who provide a home for certain other persons. Two traps here – did the child live with you for the majority of the year and are you legally considered unmarried.
You are considered unmarried for purposes of filing as Head of Household if any of the following applies:
- Legally separated according to applicable state law under a divorce or separate maintenance decree at the end of the year (if a divorce was not final at the end of the year, you are considered married);
- Married but lived apart from his or her spouse for the last 6 months of the year and meets certain other rules applicable to married persons living apart; or
- Married to a nonresident alien at any time during the year and does not elect to treat the spouse as a resident alien.
PENALTIES: By claiming the Earned Income Credit, people often get more back than they actually paid in federal income tax. If the IRS determines you made an honest error in claiming the EIC, you will need to attach additional forms to your following year’s return. If the IRS determines the error was intentional and/or reckless or even fraudulent you will be barred from claiming the credit for the two or ten years following the reckless claim. These restrictions are in addition to a repayment of the erroneous or fraudulent credit plus monetary penalties and interest.
See your tax professional or contact us for more information on these matters.
We’ll chat again soon!