Earned income credit targets workers

ORIGINALLY WRITTEN DON RATZLAFF
by Don Ratzlaff

Jane and Joe Brown have two children, Fred, age 8, and Frieda, age 6. The children lived with Jane and Joe for all of 2001. Jane earned wages of $15,000 and Joe had wages of $10,000. The Browns received $50 in interest on their saving account. They had no other income in 2001.

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Bob and Barbara White have three children-Carl, age 4, and twins Cala and Carla, age 2. Bob worked and earned $17,200. He asked his employer to contribute $1,200 of his pay to a 401(k) plan, so he will pay tax on only $16,000. He received $1,500 in unemployment compensation.

Bob also began a consulting business. After expenses, Bob had a loss of $1,000. Barbara made crafts and sold them at an arts fair. She had a profit of $705. In addition, Bob and Barbara received $50 in interest from a savings account.

***

Lydia Green is age 63 and retired. She received $7,000 in Social Security benefits during the year and $4,850 from a part-time job. She received pension payments of $6,000. Only $5,000 of those payments are taxable. Lydia earned no other income. She lived alone for the entire year and cannot be claimed as a dependent on anyone else’s tax return.

***

Dick and Darla Black have two children, Abby, age 8, and Annie, age 10. Dick owns and operates a dairy farm that had a loss of $2,000 in 2001. Linda had wages of $15,000. The couple had a $1,000 loss from the sale of stock and a $5,000 gain from the sale of some dairy cows they had held for three years.

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What do these four diverse households have in common?

They each qualify for earned income credit (EIC), which is a tax credit offered by the Internal Revenue Service for certain people who have earned income under $32,121.

A tax credit usually means more money in your pocket-either a reduction in the amount of taxes you owe, or even a refund of taxes paid.

The first thing people need to know about the EIC is that no one will alert you that might qualify-unless you happen to have your tax work prepared by a conscientious professional, who will alert you of the possibility.

“If you’re anywhere near qualifying, you probably should consult with a tax preparer to make sure that you’re maximizing your benefit,” said Bill Glazner of Adams, Brown Beran and Ball, Chtd., of Hillsboro.

“You need to know if they’re anywhere in the range of qualifying for it,” he added.

“Sometimes there are some planning issue you can do with certain taxpayers so that you qualify. I’ve had people who have had the income level that they’ve needed, but may have had slightly too much investment income, which kicks them out of place for it.”

Qualifications

So, who qualifies for the earned income credit?

First, you must meet each of the following six fundamental rules:

Rule 1: You must have a valid Social Security number.

Rule 2: Your filing status cannot be “Married filing separately.”

Rule 3: You must be a U.S. citizen or a resident alien all year.

Rule 4: You cannot file Form 2555 or Form 2555-EZ (both have to do with foreign earned income).

Rule 5: Your investment income must be $2,450 or less.

Rule 6: You must have earned income.

If you are married and file a joint return, you meet Rule 6 if at least one spouse works and had earned income. Earned income includes all the income you get from working-even if it is not taxable.

If you’re still in contention, then you must meet all the rules regarding children-or no children.

n If you have children, these are the rules:

Rule 1: The child must meet the relationship, age and residency tests.

Essentially, that means a son, daughter, adopted child, grandchild, stepchild or foster child who was under age 19 at the end of 2001 and lived with you in the United States for more than half of 2001 (or, if a foster child, for all of 2001).

A qualifying child can be as old as 24 if he or she is a student, or of any age if the child is permanently and totally disabled at any time during the year.

Rule 2: Your qualifying child cannot be the qualifying child of another person with a higher modified adjusted gross income.

Rule 3: You cannot be a qualifying child of another person.

n If you do not have a qualifying child, these are the rules:

Rule 1: You must be at least age 25, but under age 65.

Rule 2: You cannot be the dependent of another person.

Rule 3: You cannot be a qualifying child of another person.

Rule 4: You must have lived in the United States more than half of the year.

If you’re still eligible by this point, then the final qualification involves your income level. You must meet both of the following rules:

Rule 1: Your earned income must be:

n $32,121 if you have more than one qualifying child;

n $28,281 if your have one qualifying child, or $10,710 if you do not have a qualifying child.

Rule 2: Your modified adjusted gross income must be less than:

n $32,121 if you have more than qualifying child;

n $28,281 if you have one qualifying child, or $10,710 if you do not have a qualifying child.

Small-business considerations

The earned income credit is usually thought to be offered to individuals or families. But Glazner said farmers and other small-business owners ought to be aware of the program, too.

“Yes, it is for lower-income individuals, but we’ve seen a lot of small businesses that normally maybe have a very good income, but with an off year, they could very easily qualify for this,” he said.

“A lot of farmers, who maybe experienced some drought conditions, or disasters payments that kind of threw off their income for one year, may throw them into an earned-income situation,” he said.

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