Since it's tax season, let's talk about a credit that not enough individuals are claiming: the EITC -- earned income tax credit.
The EITC is a refundable credit, which means it doesn't just offset taxes. You actually get a check from the government in the amount of the credit. But you have to file a tax return to get a refund, which is paid out as a check, a bank deposit or a debit card. If you file a tax return now, a refund could hit your bank account by the end of this month.
Here is an example. "Ted" is a single 22-year-old who earned $10,000 at work in 2023.
He checked an IRS table to see if he is required to file a tax return (found in IRS Publication 501, tinyurl.com/yc6zbzvu), so until he read this column, he had no plans to file. His gross income of $10,000 falls under the required filing threshold for single filers. (Different thresholds apply based on filing statuses: single, head of household, married filing jointly, married filing separately and qualifying surviving spouse.)
If you are new to working, I highly recommend you do this exercise -- you'll see why in a moment. To figure out if you need to file a tax return, use the IRS tool called "Do I need to file a tax return?" at tinyurl.com/2p8bff9h.
Test the tool by inserting the requested information (date of birth, income, filing status), then answer "no" to all questions except this one: Are you eligible to claim the earned income credit in 2023? Say yes to that, to see how the tool addresses this refundable credit.
The answer is: "You are not required to file a tax return for 2023." But, look at this: The tool tells you, "You should file a tax return for 2023. The return may generate a refund." (By the way, you would not get this result if you were under age 25 or over age 64.)
That takes you to step two of the learning process.
Ted uses a free tax software program on the IRS website (tinyurl.com/4hsj7bnp) to do his taxes. After he enters his data, he sees that the standard deduction comes to $13,850, which means his taxable income is zero, confirming there is no need for him to file a tax return or pay a tax. After he answers questions regarding eligibility, the software automatically calculates his EIC tax credit of $583. That means he will receive a refund check of $583 even though the refund is not technically a return of taxes he overpaid. It's a refundable credit.
What should Ted do with his refund? Why, fund his IRA, of course.
While we've only talked about a single filer with no children, the EITC offers a higher potential refund depending on the number of qualifying children you are claiming as dependents, whether you are married or single. One qualifier for everyone is needing to have "worked" with "earned income" below certain thresholds, which you can look up here: tinyurl.com/yd6vpu9w.
It is worth your while to go through the process I laid out for Ted to see if you qualify for the EITC? Again, my goal for you is to free up extra cash to save for retirement.
I highly recommend you read "Who Qualifies for the Earned Income Tax Credit (EITC)" at tinyurl.com/yckdc8sw.
You can use a free tax software to do a "what-if" return or you can use the EITC Assistant tool on the IRS website at tinyurl.com/bddafhrr.
Another important resource is IRS "Publication 17 (2023), Your Federal Income Tax for Individuals for Use in Preparing 2023 Returns" at tinyurl.com/yhp9zrvr.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION