A tax break that's worth the hassle

By Bankrate.com

The earned income tax credit can be a great benefit for workers who don't make much money. This tax break returns to qualified individuals a portion of the taxes they have paid.

It even can produce a tax refund for eligible filers who had no tax liability. Most tax credits are nonrefundable, meaning they simply zero out a tax bill. For example, say you owe $800 and have a $1,000 credit. Most credits will erase your $800 bill, but you'll lose the extra $200.

But a refundable credit, which the earned income tax credit is, will allow you to get that $200 from the Internal Revenue Service.

There is, however, a drawback to this tax break: It is rather complicated, and because eligible taxpayers usually don't have much cash to spare, they generally cannot afford professional help in filing for it. The IRS has an online program, the Earned Income Tax Credit Assistant, to help these filers.

By answering some questions and providing basic income information, the online program will help you determine your correct filing status and whether your children meet the credit's requirements, and will give you an estimate of the amount of credit that you may receive.

So that you'll know what to expect when you go to the online program, here's a look at the earned income credit's basic guidelines and pitfalls.

Who qualifies?

Many people think the credit is available only to parents. It's not. But the amount the IRS will give back is greater for eligible low-wage taxpayers with children.

On 2008 returns, the maximum credit can be as much as $4,824 for workers supporting two or more kids. A worker with one child can get up to $2,917 with the credit. And $438 is available to a childless eligible employee.

The amount is adjusted for inflation each year. For 2009, the maximum credit rises to $5,028. A worker with one child can get up to $3,043 with the credit. And $457 is available to a childless eligible employee.

To qualify for the credit, a taxpayer must earn money, but not too much.

A single filer's adjusted gross income must be less than $12,880 in 2008 if he or she has no children, $33,995 with one child and $38,646 with two or more kids. Married couples filing jointly are allowed to earn $2,000 more in each category and still claim the credit.

All wage or salary income, as well as any self-employment earnings, count toward the eligibility limits. So do investment earnings. In fact, if you make more than $2,900 in investment income, you cannot file for the earned income credit.

Married couples who file separate returns are not eligible for the credit. If you are married but your spouse did not live in your home for the last six months of the year, you may be able to file as a head of a household and take the credit.

If you have no children, you must meet three additional tests before you can claim it:

• You must have been at least 25 but younger than 65 at the end of the tax year for which you are making the claim.

• You cannot be the dependent of another taxpayer.

• You must have lived in the U.S. for more than half of the tax year.

Requirements children must meet

All taxpayers claiming credits based on the children they are raising must take into account each child's age, the child's relationship to the taxpayer and where the child lived during the tax year.

In most cases, the child must be younger than 19. However, if the child is a full-time student, he or she can be as old as 24 and be claimed for the credit. Also, a permanently disabled child of any age can be claimed in connection with the earned income credit.

The relationship test is met if the child is your son or daughter (by birth or adoption), stepchild or grandchild. Your brother, sister, stepbrother or stepsister (or the child or grandchild of these relatives) may also be considered for credit purposes.

A foster-child relationship may qualify for the credit if the child was placed with you by an authorized placement agency. This includes a state or local government agency or court, as well as a tax-exempt organization licensed by a state.

As for residency, the IRS generally requires that the child live with the taxpayer in the U.S. for more than half of the year. Finally, the child must have a Social Security number.

Continued: Custody complications

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