EITC Receivers get Extra Credit

by JERRY COON

jerrycoonIncredibly enough, our Michigan legislature is giving a credit on this year’s tax return that it can ill afford. Michigan’s tax revenues are decreasing by the minute and in approximately the same proportion that the unemployment rate is increasing. However, they have still found it in their hearts to give out a very large tax break.

Starting this year, all taxpayers receiving a federal Earned Income Tax Credit (EITC) are going to also receive a refundable credit on their Michigan tax return equal to 10% of the federal EITC. I didn’t realize the Treasury had several millions of dollars in a rainy day fund in Lansing just waiting to be refunded as tax returns are filed. In fact, if what they are telling us is true, they don’t have several millions of dollars in any fund anywhere. The reality of the situation is that this refunded money is most likely going to cause some other program to be shorted. I’m doing a little complaining here because I’m afraid our schools might just be the ones that could get shorted, and that is just not right. In any event, the rules are the rules and I will get off my soap box.

This particular rule says taxpayers who receive a federal EITC will receive an additional 10% credit on their Michigan tax return. So be it. In that light, what I really need to discuss, then, is how someone qualifies for the federal EITC. There are three sets of requirements. The first set of requirements applies to all taxpayers who wish to claim the EITC. The second set applies to taxpayers who do not have qualifying children. The third set applies to taxpayers with qualifying children. The requirements that apply to all taxpayers are as follows.

The first and most important requirement is the taxpayers must have earned income. For those filing single, head of household, or as a qualifying widower with no qualifying dependents, the income range (IR) to receive a credit ranges from $1 up to $12,880. For those with one dependent, the IR is from $1 up to $33.995. For those with two or more dependents, the IR is from $1 up to $39,646. For taxpayers who file using the married-filing-joint status with no children, the IR is from $1 up to $15,880. For joint filers with one dependent, the IR is from $1 up to $36.995. For joint filers with two or more dependents, the IR is from $1 up to $41,646.

Second, the taxpayer must have a valid Social Security Number and be a U.S. citizen or resident alien all year.

Third, the taxpayer must not have investment income such as interest, dividends, and capital gains of more than $2,950.

Fourth, the taxpayer must not be filing using the married-filing-separate status.

Fifth, the taxpayer must not be filing a Form 2555, which excludes certain foreign earned income.

Sixth, the taxpayer must not be a qualifying child of another taxpayer. “Qualifying child” in this context means this taxpayer cannot qualify another taxpayer to receive EITC.

The second set of requirements applies to taxpayers who have no qualifying children. First, the taxpayer must be at least 25 but also must not have attained the age of 65 as of December 31, 2008. Sounds like age discrimination to me. Attaining age 65 really doesn’t have anything to do with anything and that person might actually need the financial help that EITC provides.

Second, the taxpayer’s principal household must be located in the United States proper for more than half of the year. “Proper” does not include U.S. possessions such as Guam and Puerto Rico.

Third, the taxpayer must not be a dependent of another taxpayer. “Dependent” in this context is a much broader term than “qualifying child.” For example, a dependent can be claimed by another taxpayer even though the dependent does not have to live in the U.S. at any time during 2008. However, by living outside of the U.S., that same dependent could not be used as a qualifying child for EITC purposes.

The third set of requirements applies to taxpayers with qualifying children. The definition of qualifying child is worthy of an article of its own, and I will devote next week’s article to that subject.

All of this discussing EITC is due to the fact that the maximum EITC amount for 2008 is $4,824 for a taxpayer with two qualifying children. This is entirely refundable and is in addition to all other credits the taxpayer might qualify for. Remember also that taxpayers receiving the $4,824 of federal EITC will also receive $482 of refundable dollars on the Michigan return. With that much money on the line, knowing the qualifications and getting the return properly done is very important. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
His email address is jcoon@actiontaxservice.com

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