THE TAX ATTIC with Jerry Coon

From an income tax professional’s point of view, I am very interested in hearing what our new governor, Rick Snyder, has to say about balancing Michigan’s budget. The previous governor and legislature apparently used up all of the smoke and mirrors that were available and might become available for the next several years.

Jerry Coon

Most likely, there will be no more stimulus money coming from the federal government to balance the budget. There will be no more shifting of funds from one account to the other in a sleight-of-hand maneuver to balance the budget. Bottom line: Governor Snyder has his work cut out for him.

The state of Michigan continues to be in poor financial condition and when the state government is in trouble, that tends to put the various municipalities and quasi-governmental organizations operating in Michigan also in trouble. If, as expected, the governor calls for elimination of the Michigan Business Tax (MBT), he also has to replace almost $2,000,000,000 in revenue. How he replaces that $2,000,000,000 is the $64,000 question. He has suggested that cutting all state employee pay by an average of 5% while also making all state employees pay 25% of their health insurance costs will cover a chunk of the deficit. Instituting a 6% corporation income tax based on federal taxable income would raise about $1,000,000,000. Dropping the 20% Earned Income Tax Credit (EITC) on the Michigan tax return would keep the Michigan Treasury from paying out approximately $280,000,000. Cutting waste and inefficiencies in the various departments could cover the rest of the shortfall. It all sounds easy sitting here in Rockford, but I’m quite sure Mr. Snyder won’t find it quite so easy or painless.

The $280,000,000 that Michigan pays out on the EITC pales in comparison to the billions and billions of dollars the federal government spends on the EITC.

Last week I discussed the EITC in general. The EITC has become an entitlement of sorts and, on the federal level, the EITC is not going away unless our entire tax system is reformed. For the most part, taxpayers must have a qualifying child in order to get their share of the pot. Let’s discuss what defines a qualifying child.

There are four tests that must be met in order for a child to become a qualifying child. First, the child must have a relationship to the taxpayer. The child must be the taxpayer’s son, daughter, stepchild, foster child, or a descendant of any of them, or a brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

Second, the child must be under the age of 19 on December 31, 2010, and younger than the taxpayer. If a student, then the child must be under the age of 24 on December 31, 2010, and younger than the taxpayer. If permanently and totally disabled, the child can be any age.

Third, the child must be a resident of the United States for more than one-half of 2010.

Fourth, the child cannot file a joint return with a spouse. However, the joint return test does not apply if the joint return is being filed just to claim a refund of all withholding.

If these rules are met, the taxpayer completes form EIC and calculates how much EITC is available. The 2010 maximum credit is $5,666 for taxpayers with three or more children, and the $5,666 is totally refundable.

With that much money available, there has been some fraud. Human nature being what it is, unfortunately it doesn’t take $5,666 to get people to attempt to cheat. To that end, preparers are required to fill out and keep as part of their permanent records a series of due diligence worksheets verifying that the proper questions were asked and the taxpayers do legitimately qualify for the EITC. The Internal Revenue Service does reserve the right to visit any tax professional and check these due diligence worksheets. The tax professional and the taxpayer both may have a problem if these worksheets cannot be produced.

Next week, I will discuss another large credit that is getting a lot of usage today, the Adoption Credit. The maximum Adoption Credit for 2010 is $13,170 per child. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com.

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