Before you file 2011 taxes, make sure you’re familiar with all the credits that could save you money.
Basically, the Earned Income Credit is a tax credit designed to put money in the pockets of moderate to low income individuals. It can reduce the amount of tax you owe and even give you a refund.
One of the ways you could potentially save money on your taxes is through the Earned Income Credit (EIC).
You may be eligible to take the 2011 Earned Income Credit if
- You earn less than $43,998 ($49,078 if married) and have 3 or more children
- You earn less than $40,964 ($46,044 if married) and have 2 children
- You earn less than $36,052 ($41,132 if married) and have 1 child
- You earn less than $13,660 ($18,740 if married) and have no children
The amount of the 2011 Earned Income Credit descends accordingly.
- For the first group (the $43,998 level) the credit is $5,751
- For the second level it’s $5,112
- For the third, $3,094
- And for the fourth, $464
What is a notice of withholding earned income credits?
There are two ways to receive the Earned Income Credit.
- You can have an employer “withhold” it from your paycheck (but because it’s a credit, the EIC actually reduces the amount taken out of your paycheck). In this case, your employer will apply the credit against the taxed portion of your income and provide you with a notice of withholding earned income credits.
- You can also claim the Earned Income Credit on your tax return and receive it as a refund.
If you choose the first option, you will receive the credit in small increments over the whole year in the form of slightly larger paychecks. The second option on the other hand gives you the credit in one large lump-sum after you file 2011 taxes the next April.
If you choose to have the Earned Income Credit applied to your paycheck, you are not required to take any action. The notice of withholding earned credit from your employer is just to inform you that he or she believes you are entitled to the EIC and will apply it to your paycheck.
This notice is not to be confused with Notice 797, “Possible Federal Tax Refund Due to the Earned Income Credit (EIC)” which the federal government requires employers provide employees informing them of the existence of the EIC and the possibility of claiming it.
You should know that not all income counts as “earned income”. Only wages, salary, tips, union strike benefits, long-term disability payments, and self-employment income count toward the credit.
Interest and dividends are not considered “earned income”. Neither are unemployment benefits, alimony, child support, pensions, and social security payments. The most investment income you can have and still take the EIC is $3,150.
Note that your children must pass the test for qualifying dependents, and no child can be used by more than one person to claim the Earned Income Credit.
Also, in order to claim the credit without kids, you must be between the ages of 25 and 65.
If you meet all of these qualifications, the Earned Income Credit can be a great way to save a little money. Make sure to look into it as you prepare to file 2011 taxes or file late taxes.
