By Paul N. Gada, Business Owner's Toolkit Staff Writer

Many eligible taxpayers failed to claim $2.6 billion in earned income tax credits (EITCs) for 1999, based on a recently released General Accounting Office (GAO) study.

According to the GAO's figures, eligible U.S. households claimed only $20.9 billion out of a possible $23.5 billion in credits during 1999. In terms of households, 12.9 million out of an eligible 17.2 million households claimed the credit, representing a 75 percent participation rate.

Taking a closer look at the specific categories of participants, households with one qualifying child had a 96 percent participation rate, while those with two qualifying children had a 93 percent participation rate. However, participation dropped sharply to 62.5 percent among households with three or more children and to 44.7 percent for childless households.

The available data did not provide a reason for the sharp decline in participation rates. However, the GAO speculates that households with three or more children might not be participating because they are led by married taxpayers that may not file income tax returns due to the higher-income thresholds for mandatory filing. For households with no qualifying children, taxpayers may be failing to participate because their benefits are significantly smaller than households with qualifying children. In addition, the GAO suggests that those households may either be above the filing threshold or below the income cut-off for the credit.

The GAO study was compiled at the request of Rep. William J. Coyne, ranking member of the House Ways and Means Oversight Subcommittee. The study, which can be found at http://www.gao.gov/daybook/020111.htm, is based on a random sample of audited returns claiming the credit.

Coyne cited the study when introducing legislation (H.R. 3574) that would increase EITC benefits. The bill would double the EITC for childless households to 15.3 percent of income and raise it from 40 to 45 percent of income for households with three or more children. Unfortunately, the proposed EITC changes won't do much good if people are not claiming the credit.

Having 25 percent of eligible taxpayers miss out on the EITC is unacceptable considering that it is considered a major federal effort to assist the working poor. The EITC is intended to offset the burden of Social Security payroll taxes on low-income workers and encourage them to work (instead of relying on welfare).

The great thing about the EITC is that it provides a refundable credit, which means you get a refund even if you don't owe any tax. In 2002, over $30 billion in refundable credits are expected to be at stake. To ensure that you don't miss out on the EITC (or any other tax credit for that matter), follow the sage advice provided below.

Assume nothing. Don't assume that the EITC does not apply to your situation because you think you make too much or you believe that you don't make enough to even have to file a return. For 2001, if you make less than $32,121 and have two or more qualifying children, or $10,710 and have no qualifying children, you should definitely explore the EITC further.

Read everything. In addition to helpful private content providers, the IRS provides a number of useful publications on this topic (and many other topics, as well). A great one concerning EITCs is Publication 596, Earned Income Credit. Also, the instructions to your basic tax forms (e.g., Form 1040) have details on the available credits and how to claim them.

Do the math. To figure the amount of your EITC, you can use the Earned Income Credit Worksheet in the instruction booklet for Form 1040, Form 1040A, or Form 1040EZ, and the Earned Income Credit (EIC) Table in the tax form instruction booklet. However, certain people must use Publication 596 to see if they meet the rules to take the EITC and to figure the amount of the credit. (Schedule EIC can be found in our Tools section.)

You must use Publication 596 if any of the following situations apply to you:

• The amount on Form 1040, line 21, includes an amount from Form 8814 (relating to a child's interest and dividends).
• Your investment income is $2,450 or more and you are filing Form 4797 (relating to the sale of business property).
• You are filing Schedule E, Supplemental Income and Loss, (Form 1040).
• You are reporting income or a loss from the rental of personal property not used in a trade or business.
• You are claiming a loss on Form 1040, line 12, 13, or 18.
• You (or your spouse if filing a joint return) received distributions from a pension, annuity, or IRA that are not fully taxable.
• You owe alternative minimum tax (AMT), found on Form 1040, line 41, or included in the total found on Form 1040A, line 35.

When in doubt, seek help. Finally, if your tolerance for taxes is low, consider seeking professional tax help. If your budget does not allow this, the IRS can actually figure your EITC for you, provided you follow their instructions for doing so (see "Read everything." above).

Always remember that the IRS, like fire, can be our friend or our enemy. Don't hesitate to use their resources wisely.

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