Most
of our readers will not qualify for this tax deduction but
many of your lower level employees or workers may, this is
why it is included here. The IRS has provided a tax credit
for low income workers that has been under-utilized, even
though it has been in place for several years.
The tax break is called the Earned Income Tax Credit(EITC),
and can provide a substantial windfall to low income workers
at tax time. The EITC is a refundable Federal tax credit
for eligible individuals and families who work and have earned
income under $32,121. The EITC reduces the amount of tax
you owe, and it may give you a refund.
There are specific qualifications you must meet to qualify
for the EITC.
You must have earned income during the year.
Your earned income and modified adjusted gross income (AGI)
must each be less than:
$10,710 if you have no qualifying children, or; $28,281 if
you have one qualifying child, or;
$32,121 if you have more than one qualifying child.
Your investment income cannot be more than $2,450. An example
of an investment income would be mutual funds held in your
name.
Your filing status can be any filing status EXCEPT married
filing a separate return.
You cannot be a qualifying child of another person. If you
are filing a joint return, neither you nor your spouse can
be a qualifying child of another person.
Your qualifying child cannot be the qualifying child of
another person whose modified AGI is more than yours.
Additionally, to claim the EITC, you must have a Social
Security Number (SSN) for you, your spouse (if filing a joint
return), and your qualifying child.
Basically, a qualifying child is a child who:
Is your son, daughter, adopted child, grandchild, great-grandchild,
stepchild, or eligible foster child, and ;
Was(at the end of the tax year) under age 19 or under age
24 and full-time student, or;
Permanently and totally disabled at any age during the year;
And lived with you in the United States for more than half
of the tax year (all of the tax year if the child is your
eligible foster child).
As you can see, the definition of qualifying child by the
IRS is quite liberal. Because of this, it is understandable
that many qualified individuals would miss this wonderful
tax credit. This is particularly true if an individual prepares
his/her own tax returns and does not read the latest tax
news.
The definition of earned income is also quite liberal .
There are two ways to get earned income:
You work for someone who pays you, or;
You work in a business you own.
Taxable earned income includes:
Wages, salaries, and tips;
Union strike benefits;
Long-term disability benefits received prior to minimum retirement
age;
Net earnings from self-employment.
Nontaxable earned income includes:
Salary deferrals (example: 401k plan);
Military combat zone pay;
Basic housing and subsistence allowances and in-kind housing
and subsistence for the U.S. Military;
Value of meals or lodging provided by an employer for the
convenience of the employer;
Housing allowance or rental value of a parsonage for the
clergy;
Excludable benefits provided by the employer such as dependent
care, educational benefits, adoption benefits, and salary
reductions, such as under a cafeterial plan.
In Summation:
Rule 1. You Must Have a Valid Social Security Number (SSN)
Rule 2. Your Filing Status Cannot Be "Married Filing
Separately"
Rule 3. You Must Be a U.S. Citizen or Resident Alien All
Year
Rule 4. You Cannot File Form 2555 or Form 2555-EZ
Rule 5. Your Investment Income Must Be $2,450 or Less
Rule 6. You Must Have Earned Income
So, there you have it in a nutshell. There are many other
factors as well. Consult with a qualified tax professional
to get the Earned Income Tax Credit for yourself, your employee,
or a relative.
Read About Tax-Efficient
Investing at MsFinancialSavvy.com!
Lois Center-Shabazz is the founder
of MsFinancialSavvy.com and author of the 3-time award-winning
personal finance book, Let's Get Financial Savvy! ISBN #0971979502.
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