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On money

Don't miss out on earned income tax credit

By HELEN HUNTLEY
Published February 8, 2004

The IRS is trying to give money away. Really.

Apparently lots of people who qualify for the Earned Income Tax Credit, or EITC, don't bother claiming it, about 4.3-million of them, according to IRS estimates. Together they leave about $3-billion on the table.

You might think it would all even out since plenty of other people collect more in EITC payments than they deserve. In fact, the IRS has been going after EITC fraud in a big way. However, the IRS says it wants everybody to pay the right amount, not too much and not too little.

"Compliance is not just enforcement activity," said David Williams, director of EITC programs for the IRS. In this case it even includes radio announcements in Spanish, informing Miami area residents about the credit.

There are lots of reasons why people may not apply. Some may not realize that rising income limits have made them eligible. Others may not know that the credit applies to workers without children if their incomes are low enough. Many of the people who fail to apply do not owe taxes. However, the credit is refundable, which means they could get a check from the IRS even if they paid nothing.

You do have to have earned income to qualify, just not too much of it. The maximum qualifying income for 2003 returns is $11,230 with no children, $29,666 with with one child and $33,692 with two. Add $1,000 to the limits for married couples who file jointly. Combat pay for people serving in the military does not count. The maximum credit is $382 if there are no children, $2,547 with one qualifying child and $4,204 with two or more qualifying children.

While the IRS is trying to encourage more people to apply, it still is trying to discourage cheating by those who do. The most common problems are married people claiming to be single, workers failing to report all their income and people claiming children as their dependents who don't qualify.

More information is available on the IRS Web site (www.irs.gov) at IRS offices or by calling toll-free 1-800-829-1040.

Q. Last year, I invested $90,000 in Nuveen Quality Preferred Income Fund and $45,000 in Nuveen Municipal Income Fund. I already gained $1,300 on principal, but I bought this for income. What do you think of these investments? I put my money there after losing a lot of money through a bad investment broker. Should I put my $17,000 in IRA money in them, too? I am 77 years old and like to be settled.

Your investments are closed-end bond funds, which trade like stocks and are more volatile than traditional mutual funds that are bought and sold through a fund company. Your funds may have gone up in value since you bought them, but they also can go down in value, which is what will happen if interest rates rise.

Investments like these funds involve a tradeoff - you accept higher risk in order to get higher income. This is fine as long as you understand that is what you are doing. However, your portfolio is riskier than it needs to be because you are not diversified. It is a bad idea to have nearly all your savings in just two investments.

Even if you don't want to buy stocks, you should consider putting some of your money into shorter-term bond funds that fluctuate less with interest rates and some into cash investments such as bank CDs or U.S. savings bonds. Of course, this approach will bring down your yield at the same time that it lowers your risk.

Q. My daughter has the means to make additional payments to principal on her mortgage. Should she pay extra each month or make one additional payment prior to the end of each year?

The earlier you make extra payments, the bigger the impact. You can get an answer personalized for your daughter's situation by going to www.bankrate.com on the Internet and clicking on "calculators" and then "mortgage calculator."

Call the company servicing your daughter's mortgage and ask how it prefers to handle extra payments. Generally, it is a good idea to send along a note asking that the payment be applied to principal.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified February 8, 2004, 01:45:41]


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