EARNED INCOME TAX CREDIT DAY February 1, 2007 Presentation by Students in the
VITA
class
Terms used in the presentation
Deduction: Expenses that reduces income subject to tax. Credit: A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed. Refundable credit: Credits treated as payments of tax. If the total of these credits, withheld federal income tax, and estimated tax payments is more than the total tax, the excess can be refunded to the taxpayer. Adjusted gross income (AGI): Gross income reduced by certain amounts, such as a deductible IRA contribution or student loan interest . Earned income—Includes wages, salaries, tips, includible in gross income, and net earnings from selfemployment earnings.
EARNED INCOME CREDIT
A Refundable Tax Credit for low-income working individuals and families.
Based on: Earned Income AGI Limits Number of Qualifying Children
Earned Income
Includes: Salary, Wages, Tips Does Not Include: Interest / Dividends Alimony / Child Support Unemployment Compensation Pensions and Annuities Workers’ Compensation Benefits
Who Can Claim?
U.S. Citizen or Resident Alien (12 months) Can not file “Married Filing Separately” Valid SS Number No Foreign Earned Income Less Than $2800 in Investment Income Cannot be the Qualifying Child of Another Taxpayer
To qualify, AGI cannot exceed certain limits
$36,348 ($38,348, mfj) more than one child
$32,001 ($34,001, mfj) one child
$12,120 ($14,120, mfj) no children
Tax Year 2006 maximum credit:
$4,536 with two or more qualifying children;
$2,747 with one qualifying child;
$412 with no qualifying children.
Use
the IRS’ EITC Assistant to determine if you are eligible to take the Earned Income Tax Credit. also, Publication 596
See
Example:
$15,000 Earned Income One Child = $2,713 EITC Two Children = $4491 EITC $25,000 Earned Income One Child = $1,115 EITC Two Children = $2,385 EITC
DEPENDENCY EXEMPTION
Taxpayers are permitted to deduct from income an amount for each person the taxpayer can claim as a dependent. Taxpayers can claim an exemption for a dependent even if the dependent files a return. For 2006, the exemption amount is $3,300 per dependent.
A Dependent Is…
Qualifying Child or Qualifying Relative Must satisfy
– Citizen or Resident Test – Dependent Test – Joint Test
See Publication 501, for more details.
Qualifying Child
Son Daughter Stepchild Eligible foster child Brother Sister Stepbrother Stepsister Descendant of these
AND…
Additional criteria
Under 19 Under 24 if full time student for 5 months Any age if permanently or totally disabled Person did not provide half of own support Person lived with you as member of your household Person is a U.S. citizen, U.S. national, of resident of Canada or Mexico
Exceptions
Person was married as of December 31
– AND files a joint return with spouse – OR does not file joint return with spouse, but is considered qualifying child of another person
Qualifying Relative
Son Daughter Eligible foster child Brother Sister Descendant of above Father Mother Sibling or Ancestor of above
Step
– – – – Brother Sister Father Mother
In-Laws
– – – – – Son Daughter Father Mother Brother
– Sister
AND
Additional Criteria
Person lived with you entire year Not a qualifying child of someone else U.S. citizen, U.S. national, resident of Canada or Mexico Person had gross taxable income < $3300 You provided over half the support
FILING STATUS
A taxpayer’s Filing Status determines a taxpayer’s Standard Deduction amount and tax rate. Filing Status also determines whether a taxpayer is eligible to claim certain other deductions and credits. See Publication 501, for more details.
Filing Statuses
Single
Joint Qualifying
Widow / Widower Head of Household Married Filing Separate
File…
If…
Single
Unmarried as of December 31 Married as of year end or spouse dies during the year
Joint
Married Filing Separately
Not required to file jointly if married Each can file separately If one spouse files separate, the other cannot file a joint return If one spouse itemizes, the other cannot take the standard deduction Some credits are not available
File…
Qualifying Widow / Widower
– For two years following death of spouse – If you maintain household for a dependent child
File…
Head of Household
– Must be single – Have dependents (See next slide.) – Pay over half the cost of maintaining the home – Exception for abandoned spouse
Married and lived with your child; but away from spouse for over half the year
Who Is a Qualifying Person Qualifying You To File as Head of Household?
IF the person is your . . .
qualifying child (such as a son, daughter, or grandchild who lived can claim an exemption for the person. with you more than half the year and meets certain other tests qualifying relative who is your
AND . . .
he or she is single he or she is married and you can claim exemption for him or her he or she is married and you cannot claim a qualifying person. you can claim an exemption for him or her5 you cannot claim an exemption for him or her
THEN that person is . . .
a qualifying person, whether or not you a qualifying person. not a qualifying person.
a qualifying person. not a qualifying person.
qualifying relative other than your father or mother (such as a grandparent, brother, or sister who meets certain tests)
he or she lived with you more than half the year, and you can claim an exemption for him or her he or she did not live with you more than half the year
you cannot claim an exemption for him or her
a qualifying person.
not a qualifying person. not a qualifying person.
SEE PUB. 17
Child Tax Credit
Publication 972
Child Tax Credit- Allows taxpayers to claim a tax credit of up to $1,000 per qualifying child.
– Can be claimed on either Form 1040 or Form 1040A – Reduces the tax and nonrefundable
Additional Child Tax Credit- Allows eligible taxpayers to claim an additional $1,000 for each qualifying child.
– Available to tax payers who are not able to claim the full amount of the child tax credit – Refundable
Child Tax Credit
To qualify, the child must:
– – – – – Be under age 17 at the end of 2006 Have not provided over half of his or her own support Have lived with the taxpayer for more than half of 2006 Be a citizen or resident of the United States Be the taxpayer's:
Son or daughter Stepson, stepdaughter, or adopted child Brother or sister Eligible descendent, or Eligible foster child
If the qualifying child is not claimed as a dependent, use Form 8901
Child Tax Credit
Amount of Credit 1. Tax Liability The credit is reduced if the tax liability is less than the $1,000 credit. If the tax liability = 0, the credit = 0
2.
Modified AGI & Filing Status
Child Tax Credit
Threshold Modified AGI- Pub 972 Filing Jointly-$110,000 Qualifying Widow(er)-$75,000 Head of Household-$75,000 Single-$75,000 Married Filing Separately-$55,000
Additional Child Tax Credit Form 8812
If tax liability is less than the allowable child tax credit .
– $1,000 for each qualifying child
The credit is generally based on the lesser of:
– 15% of the taxpayer's taxable earned income that is over $11,300, or – The amount of unused child tax credit (caused when tax liability is less than allowed credit)
Education Tax Credits
Publication 970
Hope Credit- Allows taxpayers to claim a tax credit of up to $1,650 per eligible student.
– Can be claimed only until the first 2 years of postsecondary education are completed. – Available only for 2 Tax Years.
Lifetime Learning Credit- Allows eligible taxpayers to claim up to $2,000 credit per return.
– Available for ALL years of postsecondary education and for courses to acquire or improve job skills – Available for UNLIMITED number of years. (Special rules apply to Gulf Opportunity Zone Students.)
Hope Credit
Applies:
– Applies ONLY for the first TWO years of postsecondary education. Such as College or Vocational School. (Sophomore and Freshman Only) – Taking at least one half of full time workload. – Enrolled for at least One academic period beginning 2006. – The Hope Credit Was Not claimed for more than One prior tax period.
Does not apply:
– To Graduate or Professional Level Programs. – If you have been convicted of a Felony. – If you can be claimed as a dependent on someone else’s return.
Amount of Credit
1.
Hope Credit
Up to $1,650.00 per year. Allowed 100% of the first $1100.00 of tuition and 50% of the next $1,100.00. Qualified Education Expenses Worksheet for Column © ( Form 8863 ) (Do a separate worksheet for each student) 1. Total qualified education expenses __________ 2. Less adjustments: __________ a. Tax-free educational assistance __________ b. Refunds of qualified education expenses __________ c. Other adjustments (see Pub. 970) __________ 3. Total adjustments (add lines 2a–2c) __________ 4. Qualified education expenses __________ (subtract line 3 from line 1). Enter here and on Form 8863, Part I or II, column (c)
Lifetime Learning Credit
Equals 20% of the first $10,000.00 of postsecondary tuition and fees. Maximum of $2,000.00 per tax return.
You must pay tuition and fees for: Yourself, your Spouse, or Qualifying Dependent. Available for ALL years of post-secondary education including job related courses. Available for Unlimited number of years. No Enrollment Time Restrictions. Felony Drug Conviction does not apply.
Restrictions For Both Credits
You Cannot File the Hope Credit AND the Lifetime Learning Credit in the same year.
– You must choose one or the other.
You must have proof of payment.
– You must have actual receipts of payment. The form that is provided from the college (1098T) is not allowable for tax purposes.
Rules Applying to Both Credits
Qualified education expenses do not include, Room and Board, Insurance, Transportation, or Books and Supplies. You may not take the credit if you file Married Filing Separately. Or: Your adjusted gross income is: $110,000 or more if MFJ or $55,000 if Single, HOH, or Qualifying Widower.
Preparation Dates
Saturday, February 10th Saturday, February 24th Monday, February 26th Monday, March 12th Saturday, March 24th 9:00 am – 1:00 pm 9:00 am – 1:00 pm 3:00 pm – 6:00 pm 3:00 pm – 6:00 pm 9:00 am – 1:00 pm
VITA Hot Line 678-466-4527