7 Million People Will Miss Out on a Tax Credit Worth up to $6,318

By Maurie Backman Markets Fool.com

Nobody likes paying taxes, but they can be a particular burden for low-income families. And while tax credits can help lower earners make ends meet, countless Americans pass up one major money-saving opportunity every year: the Earned Income Tax Credit.

Continue Reading Below

IMAGE SOURCE: GETTY IMAGES.

The Earned Income Tax Credit (EITC) is designed to offer a much-needed dose of tax relief for low-income households, but it's estimated that only four out of every five eligible filers claim it. Before you file your upcoming return, it pays to see whether the EITC applies to you -- because if it does, it could put up to $6,318 back in your pocket this year.

How tax credits work

Before we get into the nitty-gritty of the EITC, let's review the difference between a tax credit and a tax deduction (because there is a difference, and it's a big one). A tax deduction lowers your taxable income, but a tax credit is a dollar-for-dollar reduction of your tax liability. To illustrate the difference, your savings from a tax deduction will depend on your tax rate. If your tax rate is 25% and your neighbor's is 28%, and you each qualify for the same $1,000 tax deduction, then you'll save $250 on your taxes, while your neighbor will save $280. But if you each qualify for a $1,000 tax credit, then you'll both get to subtract $1,000 from the taxes you owe.

Most tax credits are non-refundable, which means the most they can do is knock your tax liability down to $0. The EITC, however, is fully refundable, so if it lowers your tax liability below $0, then you'll get a check for the difference. This feature of the EITC makes it particularly valuable.

Continue Reading Below

EITC eligibility

There are certain criteria you'll need to meet to claim the EITC. First, you'll need to have earned income from a job or business, and your tax filing status must be single, married filing jointly, head of household, or qualifying widow. Furthermore, your investment income for the year cannot exceed $3,450.

In addition, your income will need to fall below a certain threshold, and that threshold is based on your tax filing status and the number of qualifying children in your household. Anyone you can claim as a dependent for tax purposes -- whether it's a biological child, adopted or foster child, grandchild, or sibling under the age of 19 (or under 24 as a full-time student) -- counts as a qualifying child, provided he or she lives with you for more than 50% of the year.

The following income limits will determine your eligibility for the EITC:

Tax Filing Status

No Qualifying Children

1 Qualifying Child

2 Qualifying Children

3 or More Qualifying Children

Single, head of household, or widowed

$15,010

$39,617

$45,007

$48,340

Married filing jointly

$20,600

$45,207

$50,597

$53,930

DATA SOURCE: IRS.

How much do you stand to gain?

Depending on where you fall in terms of the categories above, you could snag up to $6,318 this year thanks to the EITC. Here's how much the credit might be worth to you based on the number of qualifying children in your household:

Number of Qualifying Children

Maximum EITC Value

0

$510

1

$3,400

2

$5,616

3

$6,318

DATA SOURCE: IRS.

While you may not qualify for the credit's maximum value, any amount you can shave off your taxes is more than welcome. In 2014, the average EITC claimant received over $2,400 -- and that can go a long way toward paying the bills.

Watch out for EITC errors

While the EITC is a valuable tax break for lower earners, it also opens the door for mistakes. According to the IRS, the most common errors associated with claiming the EITC are:

  • Claiming a child who doesn't qualify
  • Claiming the same child as another taxpayer who files a separate return
  • Listing the wrong Social Security number or legal name of the child claimed
  • Filing as single or head of household when you're actually married
  • Misreporting income on your return

If the IRS determines that you've made an error on your return, it could delay your refund or deny your EITC claim. In fact, this year, the IRS is delaying tax refunds for more than 40 million low-income families as part of its efforts to prevent EITC fraud. In 2014, the IRS issued an estimated $3.1 billion in fraudulent tax refunds, and it made the same mistake to the tune of $5.8 billion the year before. Since the agency clearly doesn't want a repeat, it's being far more vigilant this time around.

None of this is meant to discourage you from claiming the EITC if you meet the above criteria. Just be sure to double check your information before submitting your return. The EITC could mean the difference between paying your bills this year or struggling financially and taking on debt, so don't let your fear of making a mistake stop you from getting money that's rightfully yours.

The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.