Bush Signs Bill to Help Gulf Coast Tax Credits

Mississippi and Louisiana lead in the nation in the portion of families who rely on a tax credit for the working poor, the kind of help that can be disrupted by job losses and family separations like those caused by Hurricane Katrina (search).

President Bush on Friday signed into law new rules that protect those Gulf Coast (search) workers from seeing their earned income tax credits shrink. The benefit, designed as an incentive for work, can mean refunds up to $4,400 for some workers with children.

Alan Berube (search), an expert in low-income issues at the Brookings Institution, said the credit is one of the most significant things the federal government does for New Orleans, in particular.

"This year," Berube said, "it's going to mean that much more because it's going to make up some of this gap in employment and wages."

Here, in question-and-answer form, are more details about the new law and some potential problems workers should keep in mind:

Q: What is the problem?

A: The credit calculation depends on two factors, income earned from work and children. Some people who lost their jobs after the hurricane would have smaller tax credits because they won't earn as much this year. Children who live in more than one household during the year might not have lived six months in one place, a requirement to claim the credit, before the hurricane struck and some families separated.

Q: How does the law fix the problem?

A: The law says workers can choose between using income earned last year or income earned this year for the purposes of calculating the earned income tax credit. The change lets workers maximize their credit, despite prolonged unemployment after the hurricane.

Q: Which year's income should I use?

A: That depends. At very low wages, more income means a bigger credit, but once a worker makes more than about $15,000, the credit shrinks as income goes up, said John Wancheck, the earned income credit campaign coordinator at the Center on Budget and Policy Priorities. That means workers should try the calculation both ways and find out which yields a bigger credit.

Q: What about my children?

A: The new rules do not specifically change the requirement that your child live with you for six months or more this year. However, lawmakers gave the Treasury Department and Internal Revenue Service the authority to make sure taxpayers in the Gulf Coast do not lose their credits, deductions or household status because of temporary dislocations caused by the storm.

Q: How do I find out how much money I made this year?

A: Employers send that information to employees and the IRS after the end of the year.

Q: What if my employer went out of business?

A: If your employer went out of business and all of its records are destroyed, it might be up to you to piece together your income. Kathy Burlison, director of tax implementation at H&R Block, suggests you start with bank statements, checkbook registers or paycheck stubs. If your financial records were destroyed, or you cash paychecks instead of depositing them into an account, Burlison recommends sitting down with a calendar to piece together, week by week, the number of hours worked and the amount in your paycheck.

Q: Do these rules apply to Hurricane Rita?

A: No, the rules are specific to those hit by Hurricane Katrina.