Tax Credits Not to Overlook

IRS Says Millions Each Year Fail to Claim EITC Which Could Add Almost $8K to Their Refund

The Internal Revenue Service (IRS) says that some 23 million workers and families have received about $64 billion total from Earned Income Tax Credits (EITC) since the antipoverty tax break was established 50 years ago, but many taxpayers fail to claim the credit each tax season, missing out on up to almost $8K added to their refunds.

“The IRS estimates that roughly one in five eligible taxpayers miss out on claiming this valuable credit,” said the IRS.

The EITC is a Refundable Tax Credit

The EITC is a refundable tax credit meaning that the tax credit is a dollar-for-dollar amount taxpayers claim on their return to reduce the income tax they owe. Eligible taxpayers can use them to reduce their tax bill and potentially increase their refund.

“Some tax credits are refundable. If a taxpayer's tax bill is less than the amount of a refundable credit, they can get the difference back in their refund,” says the IRS. “Some taxpayers who aren't required to file may still want to do so to claim refundable tax credits.”

You can claim the EITC if your income is low- to moderate. The amount of your credit may change if you have children, dependents, are disabled or meet other criteria.

The EITC was introduced in The Tax Reduction Act of 1975 as a modest tax break to provide financial help to economically challenged families and encourage work.

“Over the year, EITC has evolved into one of the federal government’s largest antipoverty programs through a series of legislative changes,” said the IRS.

Do You Qualify for the Earned Income Tax Credit?

Workers may use the EITC Assistant, an online tool, to check their eligibility for the EITC, which can be affected by changes in marital, parental, and financial status.

On average, eligible taxpayers received $2,743 from the credit in tax year 2023.

Eligible workers between the ages of 25 and 65 who have no dependents may receive up to $632 by claiming the EITC, while married but separated spouses who do not file a join return may qualify for the EITC if they meet certain requirements.

Those with qualified children can receive a maximum of $7830 when claiming the EITC for tax year 2024, up from $7,430 in tax year 2023.

EITC is for workers whose income did not exceed the following limits in 2024:

Investment income must be limited to $11,600 or less. Workers almost must:

• Be a U.S. citizen or resident alien all year.
• File a tax return even if their income level doesn’t usually require them to file.
• Have a valid Social Security number (SSN) for themselves, as well as for their spouse, if filing a joint return, and for each qualifying dependent claimed for the EITC.
• File a return without Form 2555, Foreign Earned Income.

There are special rules for military personnel, clergy and ministers and taxpayers with certain types of disability income or a child who is disabled.

How to Claim the EITC

Workers must file a tax return and claim the credit on that return to get the EITC.

The Where’s My Refund? Tool, which allows taxpayers to monitor the status of their refunds, will be updated with projected deposit dates for most early EITC refund filers by Feb. 22, 2025.

The IRS estimates that most EITC related refunds should be available in bank accounts or on debit cards by March 3, 2025, as long as there are no issues with a taxpayer’s return and they chose to receive their refund by direct deposit.

Some taxpayers may get a letter from the IRS regarding EITC.

“If you received a letter from the IRS, don't ignore it. Follow the directions on your letter, it includes all the information you need to respond,” explains the IRS.

Taxpayers letters may be requesting more information to qualify for the EITC or may be notifying the taxpayer that they may qualify for the credit:

• My letter says I need to send information to verify my credit: The IRS is auditing your tax return and needs information from you to verify the credit you claimed. The IRS may be holding your refund and will hold it until your audit is complete. Don’t ignore this notice. Notice numbers may include:

o   Notice CP06.

o   Notice CP75.

o   Notice CP75A.

• My letter says I may qualify for the EITC: The IRS sent you a letter because their records show you may be eligible for the EITC but didn’t claim it on your tax return. Find out if you qualify by following the steps shown in your notice:

o   Notice CP08.

o   Notice CP09.

o   Notice CP27.

Other Tax Credits You May Qualify For

Tax professional Steve Powell of Texas-based Powell Tax Law says those that qualify for the EITC may also qualify for other tax credits.

“There is a wide array of tax credits such as child and dependent care credits and education credits, and the amount and types may vary each tax year,” says Powell.

Here are some other tax credits to not overlook:

• Child tax credit and credit for other dependents: The Child Tax Credit helps families with qualifying children get a tax break. You may be able to claim the credit even if you don't normally file a tax return. You qualify for the full amount of the 2024 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return). Parents and guardians with higher incomes may be eligible to claim partial credit.
• Child and dependent care credit: If you paid someone to care for your child or other qualifying person so you (and your spouse if filing jointly) could work or look for work, you may be able to take the credit for child and dependent care expenses. Your federal income tax may be reduced by claiming the credit for child and dependent care expenses on your tax return. A qualifying person generally is a dependent under the age of 13, a spouse or dependent of any age who is incapable of self-care and who lives with you for more than half of the year.
• Education credits: An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available:

o   American Opportunity Tax Credit (AOTC): The AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The amount of the credit is 100 percent for the first $2,000 of qualified expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.

o   Lifetime Learning Credit (LLC): The LLC is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

Navigating the world of IRS tax credits and other rules can be quite confusing, especially during the pressure of tax return season. If you have any IRS-related questions, reach out to the tax pros at Powell Tax Law today for answers.