CLINTON BUDGET AFTERMATH : Q&A; : Plan Expands Government’s Income Tax Break for Low Earners

President Clinton’s new budget does more than raise taxes. It also expands one of the government’s most generous tax breaks to the poor: the earned income tax credit.

The credit, which has been exclusively for families with young children, will be available under the Clinton plan to anyone with an income low enough to qualify, starting in 1994. You don’t have to pay federal income tax to get it.

Additionally, the amount given to families with children will be a bit more generous in 1994, and it will be easier to apply.

Here are some answers to questions about the changes:

Q. What is the earned income credit?

A. It is a refundable tax credit for families earning roughly $22,000 annually or less in 1993. That income limit rises in 1994 to as much as $28,000 for families with two children. (The income limitations and the amount of the credit is adjusted for inflation each year.)

In theory, the credit aims to refund Social Security tax payments that are paid both by you and your employer. However, in many cases, it’s more generous than that. You actually end up getting back more than you paid in.

The current credit is relatively complicated because it’s broken into three parts. You get a basic credit simply for having earned income and qualifying children, a second amount if you buy health insurance for your family and a third amount if you have an infant. You have to fill out a two-page form, as well as the 1040 or 1040A form, to figure out how much you get.

Q. How has that changed with the Clinton plan?

A. The biggest change is that some earned income credit money will be available to anyone between the ages of 25 and 65 with a very low income, regardless of whether or not they have children. (If you have children who qualify, you are eligible regardless of age, under current law and the new plan.)

Additionally, the health care and infant portions of the credit have been repealed. Now there’s simply one credit that’s based on your income and the number of children you have. That’s expected to make the application process far simpler.

Q. Why was the credit enhanced when the government is trying to raise tax revenues?

A. President Clinton’s goal was to boost every working family above the poverty level. Along with food stamps and other aid programs, the new earned income credit could do that, he said. It falls a bit short, but it’s still among the most generous government aid programs available to working families.

Q. How much can I get?

A. If you have no children, the maximum credit will be $306 in 1994 when the new rules take effect. If you have one child, the maximum credit will be $2,038. If you have two or more children, the maximum will be $2,527.

However, exactly how much you get will depend on your income. The IRS will provide tables to calculate the amount.

Q. How do I apply for the credit?

A. Currently, you must fill out a standard tax form--either the 1040 or the somewhat simpler 1040A--and a separate earned income credit form, which is broken into three parts. Since the new rules don’t go into effect until 1994, that procedure is expected to remain the same for the 1993 tax year. After that, the earned income credit form is expected to be eliminated entirely and simply replaced with a line or two on the 1040 form.

Q. I’ve heard that a lot of people who qualify for this credit don’t apply for it. Why?

A. Reasons include general misunderstanding about the tax code and the demographic group that this credit seeks to aid. Many people who qualify don’t have to file tax returns because their income is below filing thresholds. Married couples, for example, didn’t have to file tax returns if they earned less than $10,600 in 1992--and that threshold is increased for inflation each year. But if they don’t file, they can’t claim the credit.

Additionally, many experts believe that some eligible individuals are homeless and unable to fill out the requisite paperwork to collect the credit.

Q. Is anything being done to change that?

A. Yes. The simpler credit will make it easier to fill out the forms. Congress also asked the IRS to conduct outreach programs, specifically aimed at homeless people, telling them about the credit and helping them apply.

Q. A big refund sounds great, but I could use the money for necessities throughout the year. Is there any way to get the money early?

A. Yes. Ask your employer for information about advance payment of the earned income credit. The employer will have you fill out a form, and if you’re eligible, they’ll pay you up to 60% of the credit amount with your wages.

Q. I’ve never claimed the credit before, but I think I qualify. Can I get a refund for past years?

A. Yes. If you filed tax forms but simply failed to claim the credit, file an amended tax return. If you were not required to file because your income was low enough to exempt you from federal tax, you can still claim the credit by simply filing the tax forms now.

There’s a limit to how many years you can claim, however. For more information or forms, consult a tax adviser or the IRS. You can contact the IRS at (800) TAX-FORM to get the schedules you need, or call (800) TAX-1040 for information about how to file an amended return.

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