Are you looking forward to a large refund this year? If so, the Earned Income Credit (EIC) could be a huge part of it. And knowing just a little bit about how this credit works can help with year-to-year tax planning in maximizing your refund.

The EIC stands for Earned Income Credit. You must have earned income to qualify for the EIC such as from a W2 or self-employment profit. If all of your income comes from unearned income such as unemployment, workmans comp, disability, child support, etc. then you will not qualify to receive this credit. As unfair as it may seem the IRS will not allow it.

The EIC is based on either one or two children. If you have three or more children it will not cause you to receive more of a credit. Two is the most that IRS will consider. That does not mean you cant claim more kids on your return it just means at most two will qualify for the EIC. The children you claim for the EIC must be related to you. Period. If they are not related then you cannot claim the EIC but you may still be able to claim them as a dependant. Check with your preparer on this issue.

Your income level plays a huge part in determining how much of a credit you will receive. For instance, you may qualify for the EIC if youre single with one child and your income level does not exceed $33,200. For married couples with at least one child your income must not exceed $35,200. As long as your income stays below these thresholds, then you may be eligible for some EIC. The amount of EIC you may receive is dependant upon exactly where your income level falls.

There is an income range that will net you the maximum Earned Income Credit! If you are single and your income is between $11,800 - $15,400 then you may qualify for up to $4,716 of earned income credit for two kids and up to $2,853 for one child! As your income either increases or decreases from this perfect range your EIC will continue to drop until it diminishes to zero. Example: last year you made $12,000 and received an EIC of $4700. This year you made around 25,000. Your EIC will drop to around $2700. On the opposite end of the spectrum, lets say you made $5,000 this year, then your EIC would drop to $2000. As you can see in both instances your credit dropped from the prior year. The end result refund on your tax return can change significantly from year to year as your income changes sometimes for the better and sometimes for the worse. For the most part, we as Preparers cannot do much to increase your EIC. It is what it is, however if you are self employed you may have the ability to create a small windfall for yourself! Read on!

The self employed business or farm owner can take full legal advantage of the EIC. Lets say in your business, you are currently showing a $30,000 profit and this is your only income. Lets also say you are married and have 2 kids for the EIC. Your EIC would be $2,066. Not bad. But it could be better. What if you had bought a large piece of equipment costing you $15,000? You have the opportunity to write off that entire piece of equipment in one year if you choose! If you did, your profit would be cut down to $15,000 and this would jump your EIC all the way up to $4716! An increase of $2,650 on the Earned Income Credit, not to mention the SE tax savings as well. What an advantage the self-employeds have over the rest of us!

The EIC can be very confusing if your not used to dealing with it on an everyday basis. I would highly recommend a seasoned professional to make sure your maxing out your Earned Income Credit. Planning opportunities & pitfalls are abound in many cases and I dont want Uncle Sam keeping any more of your money than he already is. Oh, I almost forgot. A taxpayer who is over age 25 and is single with an earned income level below $12,590 or married with income below $14,590 can also receive a small Earned Income Credit when they do not have any kids at all! Do not miss this if you qualify!