Maxing the EITC

[TomTX]

So, a fair number of Mustachians ought to be able to achieve at least some of the Earned Income Tax Credit (EITC). For all the examples, I am going to use my own situation (and the same as MMM): Married, 1 child.

I decided to try and figure this out. Input is welcome.

If you go to the EITC table you can see that the maximum you can achieve is $3,305 with income of $9,700 to $23,299. It totally phases out at $43,940 with a credit of a whole $3.

http://apps.irs.gov/app/vita/content/globalmedia/earned_income_credit_table_1040i.pdf

Now, lets go to the main form and see how the IRS figures "income" for the purposes of the EITC (because we can't just have ONE definition of income, right?)

http://www.irs.gov/pub/irs-pdf/p596.pdf

You have to figure both AGI, and "Earned Income" - which isn't exactly clear. I believe IRA contributions reduce AGI, but not Earned Income. 401k contributions should reduce both.

So, $23,299. With the standard deduction and exemptions toaling $24,250 you should have no tax due. You get $3,350 from the EITC, $1,000 from the Additional Child Tax Credit

Add up $23,299 + $3,350 +$1,000 = $27,649.

So, "spending money" of $27,649.


GOTCHAS: If you have any of these, no EITC for you!

Too much interest income. $3,350 kills it.
Filing separately. If you are married, you must file jointly.
Not being a US Citizen or resident alien all year.
Foreign earned income

Lesser GOTCHA. Might reduce your amount, or eliminate EITC
Too high Earned income, even though AGI is low enough.

I'm sure that I'm missing stuff. What is it?

[forummm]

GOTCHAS: If you have any of these, no EITC for you!

Too much interest income. $3,350 kills it.

This includes dividends and capital gains. Which is good as one way to limit people with a ton of money from abusing the credit. We don't need 30 year old millionaires taking it.

I'm glad to know that this is here for lower-income people with children.

[La Bibliotecaria Feroz]

GOTCHAS: If you have any of these, no EITC for you!

Too much interest income. $3,350 kills it.

This includes dividends and capital gains. Which is good as one way to limit people with a ton of money from abusing the credit. We don't need 30 year old millionaires taking it.

I'm glad to know that this is here for lower-income people with children.

I qualified for this for the 2013 tax year. Mr. FP was a boarding school teacher getting free housing for the family (plus we could eat in the dining hall during the school year) but making under $40K--I suspect any junior faculty who had kids and SAH spouses qualified. We weren't that broke since we weren't paying housing, but it's not like I sent the money back!

[teen persuasion]

Check your state income tax rules.  My state matches EITC at 30%, and CTC @ 33%.  There are more ridiculous gotchas, like children under 4 do not get matching CTC, and amounts are reduced by other credits, but amounts can be substantial, especially with more children.

[Cpa Cat]

When parents are divorced, the non-custodial parent can't claim the EITC - even if there is an agreement in place that the non-custodial parent claims the child on their tax return.

I would encourage anyone who plans on claiming the EITC to go through Form 8867, which is the Paid Preparer's Due Diligence Checklist. If you don't pay someone to prepare your return, you don't have to include this with your return, but it walks you through what the IRS looks for when examining the EITC.

The EITC is one of the most audited personal tax return items (due to high level of fraud and improper claims).

If you have a Schedule C (self employment income), it's particularly important to keep good business records when claiming the EITC. Among EITC examinations, Schedule C + EITC is an audit magnet.

[johnny847]

GOTCHAS: If you have any of these, no EITC for you!

Too much interest income. $3,350 kills it.

This includes dividends and capital gains. Which is good as one way to limit people with a ton of money from abusing the credit. We don't need 30 year old millionaires taking it.

I'm glad to know that this is here for lower-income people with children.

I qualified for this for the 2013 tax year. Mr. FP was a boarding school teacher getting free housing for the family (plus we could eat in the dining hall during the school year) but making under $40K--I suspect any junior faculty who had kids and SAH spouses qualified. We weren't that broke since we weren't paying housing, but it's not like I sent the money back!

Just be aware that the employer provided housing may be considered taxable income. The third exception listed here seems to apply in your situation, but it does not exclude the full value of the housing either.

[MDM]

So, a fair number of Mustachians ought to be able to achieve at least some of the Earned Income Tax Credit (EITC). For all the examples, I am going to use my own situation (and the same as MMM): Married, 1 child.

I decided to try and figure this out. Input is welcome.

If you go to the EITC table you can see that the maximum you can achieve is $3,305 with income of $9,700 to $23,299. It totally phases out at $43,940 with a credit of a whole $3.

...

I'm sure that I'm missing stuff. What is it?

Yes, that's it for 2014.  In 2015 the numbers are a little higher: $23,630 income, MFJ w/ 1 child (and all the caveats above) gives $3,359 for EIC.

These calculations are part of the case study spreadsheet.

[Mississippi Mudstache]

We were eligible for a partial EITC in 2013. We were not in 2014, due to some hefty bonuses from work. This year, we are expecting our 3rd (and last) child, and my income will be back down to 2013 levels, so we may be eligible for a credit of several thousand dollars. We'll see when tax time rolls around.

Also: we will have about 5 or 6 thousand in losses to claim from a rental property (wanted to sell the house, but ended up renting it instead, so it was vacant for half the year - hence the big losses). Will this trigger the same kind of scrutiny as a Schedule C? I'm not too worried, since I don't intend to lie on my taxes, but I figured it would be good to know if I'm at a high risk of an audit.

[Cpa Cat]

We were eligible for a partial EITC in 2013. We were not in 2014, due to some hefty bonuses from work. This year, we are expecting our 3rd (and last) child, and my income will be back down to 2013 levels, so we may be eligible for a credit of several thousand dollars. We'll see when tax time rolls around.

Also: we will have about 5 or 6 thousand in losses to claim from a rental property (wanted to sell the house, but ended up renting it instead, so it was vacant for half the year - hence the big losses). Will this trigger the same kind of scrutiny as a Schedule C? I'm not too worried, since I don't intend to lie on my taxes, but I figured it would be good to know if I'm at a high risk of an audit.

The problem with Schedule C's is that the IRS is concerned that people might not report their income and expenses accurately, in order to qualify for the EIC.

While it's certainly possible to manipulate your rental income and loss in this same way, there is no due diligence requirement for paid preparers to scrutinize Schedule E in the same way as Schedule C. That suggests that the IRS is concerned with Schedule C, specifically.

That said, all EIC returns are at risk of additional scrutiny (it just has a high level of fraud). In the grand scheme of EIC returns, people with basic W-2s are the easiest to verify (but can still be audited in order to prove their kids qualify for the EIC) so they have the lowest probability of audit. Whereas, at the other end of the spectrum, people basically just make up numbers for Schedule C in order to qualify for the EIC - so hardest to verify and subject to the most scrutiny.

I imagine a rental property would fall somewhere in the middle - it has consistent expenses from year to year. It's not unreasonable to expect it to be vacant. I would anticipate that it might trigger an examination if you mysteriously had just enough vacancy each year to reduce your income enough to qualify for the EIC. Or, if your passive rental income each year came to $3,345 and never a penny more.

If I were in the EIC position with a rental loss, I would make sure to place a copy of any written evidence that I have for the vacancy in my file with this year's return, along with evidence of my expenses. If your tax return is accurate, then finding the documents tends to be the highest-stress/highest-time-cost portion of an IRS inquiry - because the IRS rarely audits anyone "fresh" - tax returns are usually 2 years old before serious inquiries are made, and it can be hard to pull together documents from 2 years ago.

[Mississippi Mudstache]

If I were in the EIC position with a rental loss, I would make sure to place a copy of any written evidence that I have for the vacancy in my file with this year's return, along with evidence of my expenses. If your tax return is accurate, then finding the documents tends to be the highest-stress/highest-time-cost portion of an IRS inquiry - because the IRS rarely audits anyone "fresh" - tax returns are usually 2 years old before serious inquiries are made, and it can be hard to pull together documents from 2 years ago.

Good info here. Thanks.