The Earned Income Tax Credit in Colorado

Tax Credits Help Striving Families Become Thriving Families

The Earned Income Tax Credit (EITC) is a federal tax credit that helps low-income working families help themselves.

It rewards low- and moderate-income families for their hard work and helps them close the gap between what they earn and what they need to get by and get ahead. Columbia University's National Center for Children in Poverty found the EITC reduces poverty among young children by nearly 25%.

The EITC can make a significant difference for hardworking families.

For tax year 2009, it is worth as much as $5,657 to families. For example, a single parent raising two children and earning $12,200 will be eligible for an EITC refund of $5,028 a 39% increase in family income. Many qualifying families also will be eligible for the Child Tax Credit, as much as $1,000 per child.

Workers access the benefits of the EITC by filing a tax return.

Workers who qualify can get back some or all of the federal taxes withheld from their paychecks throughout the year. They may also get additional cash back from the IRS, because the EITC is a refundable credit. The amount is based on how much people earn and the number of qualifying children.

The EITC has a long history of bi-partisan support.

Started by President Ronald Reagan and expanded by presidents George H.W. Bush and Bill Clinton, the EITC has become the nation's largest and most effective anti-poverty program. Nearly 24 states, have followed suit and enacted state EITCs. Colorado's state EITC program was suspended in 2002 due to state budget constraints.

EITC Helps Colorado Workers Throughout the State

The federal EITC benefits thousands of families in Colorado.

In 2006, 268,000 families, about 13% of Colorado tax filers, claimed the federal EITC. It is claimed equally by Coloradans living in rural, suburban, and urban areas. (See fact sheet: "EITC Claims by County in Colorado.")

$470 million of EITC went to Colorado workers in 2006, which stimulated Colorado's economy.

When families spend their EITC refunds on goods and services, local merchants benefit. Economists estimate that EITC dollars will be re-spent 3--5 or more times within the local economy. The real economic impact of the $470 million received by families in 2006 may have been as much as $2 billion statewide.

Families use their EITC refunds to pay off debt, invest in education, finance transportation to work and secure decent housing.

According to local research, one of the most frequent uses of EITC refunds is school clothing and school supplies for children.

Too Many Eligible Colorado Families are Still Missing Out

Too many eligible families miss out because they are not aware that they could benefit.

Recent IRS estimates suggest that approximately 24,000 Colorado workers may miss out on the credit annually, leaving as much as $38 million of local economic stimulus on the table, and more if the "multiplier effect" is considered.

Many families who do claim the credit lose a significant sum to unnecessarily high transaction costs.

Large numbers of families who claim the EITC pay $100 to $200 to commercial tax preparers. These preparers often encourage "refund anticipation loans" (also know as instant refunds), which cost families additional fees and interest rates as high as 800%. The number of refund anticipation loans issued to EITC filers in Colorado continued to grow over the years but finally showed a slight decline in 2002, according to the Brookings Institution: 56,000 in 1999 (25.7%), 60,000 in 2000 (27.4%), 67,000 in 2001 (30.7%), 62,000 in 2002 (25.5%), 63,000 in 2003 (24.5%), 57,000 in 2004 (21.9%) and 53,000 in 2005 (20.1% of EITC filers).

EITC Statistics by County in Colorado

Fact Sheet: How Many Colorado Working Families Would Benefit from a Permanent State Earned Income Tax Credit?

EITC Data by State Legislative District

Who Can Get the EITC, How Much Is It Worth, and Which Children Qualify

Single or married people who worked full time or part time at some point in 2009 can qualify for the EITC, depending on their income.

Workers who are raising one child in their home and have family income of less than $35,463 (or $40,463 for married workers) in 2009 can get an EITC of up to $3,043.
Workers who are raising two children in their home and have family income of less than $40,295 (or $45,295 for married workers) in 2009 can get an EITC of up to $5,028.
Workers who are raising three or more children in their home and have family income of less than $43,279 (or $48,279 for married workers) in 2009 can get an EITC of up to $5,657.
Workers who are not raising children in their home, and are between ages 25 and 64 on December 31, 2009, and have income below $13,440 (or $18,440 for married workers) can get an EITC of up to $457.

Workers with investment income exceeding $3,100 in 2009 may not claim the EITC.

Which children qualify for the EITC?

"Qualifying children" include: sons, daughters, stepchildren, grandchildren and adopted children. Brothers, sisters, stepbrothers or stepsisters -- as well as descendants of such relatives -- if they were cared for as members of the family. Foster children who are placed with the worker by an authorized government or private placement agency also qualify. "Qualifying children" must live with the worker for more than half of the year. They must be under age 19, or under age 24 if they are full-time students. Totally and permanently disabled children of any age also may be qualifying children. Valid Social Security numbers are required for qualifying children born before December 31, 2009.

EITC and Public Benefits

Can people who work and also get welfare benefits, still get the EITC or Child Tax Credit?

Yes, as long as they earn wages, and meet the income and other eligibility requirements. These workers may use the Advance EITC payment option, if they wish.

NOTE: Some welfare recipients are required to participate in "work experience" and "community service programs" (often called "workfare") in exchange for their cash assistance benefits. These benefits are not counted as income to determine eligibility for the EITC or Child Tax Credit. However, current or former recipients who are employed in private or public sector jobs for which employers are subsidized through state welfare block grants or other government programs do earn wages that count in determining eligibility for the EITC and Child Tax Credit. For more information, contact the Center on Budget and Policy Priorities, (202) 408-1080.

Will getting the EITC or Child Tax Credit lower other government benefits? Could someone lose benefits altogether?

Generally, no. Under federal rules, the EITC (including advance payments) and Child Tax Credit are not counted as income for Medicaid, food stamps, SSI or federally assisted housing programs. However, the EITC and Child Tax Credit can count as a resource in determining eligibility for some benefit programs. Often, if the recipient has few or no other resources, saving part of a tax credit is not enough to cause that recipient to exceed the resource limit for a benefits program. For example, if your state has a resource limit for Medicaid, here's how it works: the EITC or Child Tax refund must be spent by the end of the month in which it is received or the amount saved may be counted against the dollar limit on resources. However, many states now have no resource limit for families on Medicaid; that is, they do not count assets in determining eligibility. Thus, saving an EITC refund would not affect eligibility for Medicaid in those states. For SSI, the EITC and Child Tax Credit do not count toward the resource limits for nine months after the refund is received. The EITC does not count as a resource in food stamps for 12 months after the refund is received, but Child Tax Credit refunds are excluded only for the month the refund is received and the following month. Deposits in certain types of Individual Development Accounts (IDAs), which may include some of a worker's EITC or Child Tax refund, do not count as a resource in determining eligibility for the above programs or for state cash assistance programs.

Welfare cash assistance programs are administered by states under a block grant called Temporary Assistance for Needy Families (TANF). Each state can set its own rules for how the EITC will be treated in determining eligibility for cash assistance. Under federal law, the Child Tax Credit may not be counted as income in determining eligibility for cash assistance. Currently no state counts the EITC refund as income to determine eligibility, except that in Connecticut, under some circumstances, Advance EITC payments may affect a worker's TANF eligibility. The rule for most state TANF programs is that the EITC must be spent by the end of the month after the month in which it is received or it can count as a resource. However, some states may have adopted less restrictive policies. Contact your state or local welfare department for information.

Rules on how the EITC may affect "General Assistance" benefits are different in each state where a general assistance program is in place. Contact your state or local welfare department for information.

How to Claim Back EITCs and Other Filing Questions

What if a worker was eligible for the EITC or Child Tax Credit in past ears but didn't claim it?

Workers can file for tax credit refunds for the last three years. For example, a worker who was eligible for the EITC and Child Tax Credit in 2007 but did not claim it can fill out a Form 1040X, "Amended U.S. Individual Income Tax Return," and attach it to a copy of the 2007 tax form he or she filed that year. Workers claiming a child for the EITC also must fill out and attach Schedule EIC for 2007. To claim the Child Tax Credit refund, Form 8812 is required. For copies of prior-year forms, call 1-800-TAX-FORM.

What happens if a worker files for a prior year and the IRS finds out that taxes are owed?

The worker must pay whatever is owed. But: The EITC or Child Tax Credit may be enough to cover the taxes owed. The IRS is usually willing to work out payment plans for back taxes. The worker may be able to make an "offer in compromise" that is less than the tax bill.

What about workers who did not file a return and discover they had been eligible for the EITC or Child Tax Credit?

A worker must file a separate return for each year in which he or she qualified and, if claiming a child for the EITC or Child Tax Credit, also fill out and attach the Schedule EIC or Form 8812 for that year. A Form 1040X is not required. There is no late filing penalty, unless the worker owed income tax in the prior year. The amount owed the IRS will be deducted from the worker's refund. Workers who may owe taxes in excess of their refund should seek assistance from a Low Income Taxpayer Clinic, accountant, or attorney and, if necessary, arrange a payment agreement with the IRS.

Will the IRS request any additional information?

Generally, the IRS will not require any additional information. But, if information provided on the tax return or Schedule EIC seems questionable, the IRS may request additional documentation to verify the EITC or Child Tax Credit claim. In such cases, the IRS will send the filer a questionnaire that specifies the type of document that must be submitted. For example, a filer may be asked to submit a copy of a qualifying child's birth certificate. It is important that the name on the birth certificate match the name of that child's Social Security card. If a child is over age 24 and permanently and totally disabled, proof of disability status could be requested. The IRS also may require documents verifying that a qualified child actually lived with the filer for the required period of time.

Filers claiming the EITC and Child Tax Credit should not mail in any additional documentation with their tax returns unless such documentation is specifically requested by the IRS. If additional information is requested, filers need submit only the documents specified.

Exception: Workers whose EITC claim was disallowed in a previous year, but who now claim they are eligible, must attach Form 8862, "Information to Claim Earned Income Credit After Disallowance," to their tax return in order to submit a new claim.

Can self-employed workers get the EITC?

Yes. They will need to use Form 1040 to file their tax return and fill out additional forms: Schedule C ,"Profit or Loss from Business," (or Schedule C-EZ) and Schedule SE, "Self Employment Tax," if their self-employment income is more than $400. Call the IRS at 1-800-TAX-FORM to get the necessary forms or download them at: http://www.irs.gov/formspubs.