Promote the Earned Income Credit And Child Tax Credit Date: Presentation by: Organization: Phone: Email:
Federal tax benefits for low-income working families and individuals Purpose: Offset income and payroll taxes Supplement wages Provide a work incentive Key Features: Reduces taxes workers may owe Even if workers don’t owe taxes, they may be eligible Some families can claim both credits What are the Earned Income Credit (EIC) and the Child Tax Credit (CTC)?
How do Workers Use the Credits? Child Care Rent & Utilities Transportation Medical Expenses AutoRepairs Basic Needs The credits help workers keep working and care for themselves and their children.
Why is Outreach Needed? EIC Eligible Workers 20 - 25% Do Not Claim EIC 75 – 80% Claim EIC
Why is Outreach Needed? Nationally, over $10 billion in EIC refunds may have gone unclaimed in 2012 Efforts are needed to ensure eligible workers know how to claim the EIC and other tax credits.
Did You Know…? The Earned Income Credit (EIC) Boosts Workers’ Income • As much as a 45% pay increase • $8/hour job $10+/hour job
Did You Know…? The EIC & CTC Lift More than 9 Million Above the Poverty Line 2011
How Much Can Workers Earn and Still Qualify for the EIC? For Tax Year 2013: • Income limits for married workers are $5,340 higher than these amounts. • Workers not raising children must be between the ages of 25 and 64. • Investment income cannot exceed $3,300.
The Federal EIC in Tax Year 2013 Workers with 3 or More Children
EIC Impact on Annual Wages Single worker raising one child: • $8.00/ hour job + EIC = $10/hour job • Annually: $16,000 + EIC = $19,250
How Does the CTC Work? • Reduces or eliminates any income tax owed or withheld. • Workers may get any remaining CTC as an additional refund also referred to as the Additional Child Tax Credit (ACTC).
Workers who earned more than $3,000 in 2013 can get a CTC refund. How Much Can Workers Earn and Qualify for the CTC? The CTC is worth up to $1,000 for each qualifying child.
Includes: Wages, salaries, and tips Net earnings from self-employment Union strike benefits Employer-paid disability benefits Military combat pay Doesn’t Include: Non-taxable earned income Payroll deductions for dependent care or retirement plans Public benefits Social security, SSI, welfare Other income, such as: Unemployment Alimony and child support Interest on bank accounts Investment income What Counts as Earned Income?
The EIC and ACTC are “Refundable” Tax Credits What does this mean?
Most Tax Credits are “Non-refundable” They simply reduce or eliminate the income tax you owe. For Example: $1,000 - $400 = $600 Non-refundable Tax Credit Income Taxes Owed Remaining Tax Credit
How is a “Refundable” Credit Worth More? $1,000 - $400 = $600 Refundable Tax Credit Income Taxes Owed Remaining Tax Credit
Meet Maxine • She earns $19,000 this year. • $225 in income tax has been withheld. • Her total tax refund is $4,015! Maxine is a single mom raising a 6-year old son. How is this possible?
Maxine’s Tax Refund EIC $ 3,015 CTC + $ 1,000 Total Tax Benefit $ 4,015
How do We Get the CTC Amount? √ • It first reduces or eliminates any income tax owed • Then, workers may get any remaining CTC as an additional refund Calculate the CTC: For the Additional CTC, a family can get whichever is LESS: • A.The amount of the CTC that remains after income tax is eliminated, OR • B. 15% of the family’s taxable earned income over $3,000
How Does That Work for Maxine?√ A. Remaining CTC after income tax is eliminated: • $1,000 - $225= $775 OR B. 15% of Maxine’s earned income over $3,000: • $19,000 - $3,000 = $16,000 and $16,000 x 15% = $2,400 The Additional CTC is the lesser of A and B. In this case, Maxine’s Additional CTC is $775.
Maxine’s Tax Refund √ EIC $ 3,015 CTC ($1,000) Return of income taxes withheld $ 225 Additional CTC+ $ 775 Total Tax Benefit $ 4,015
How Do You Claim the Credits? • You must file a tax return! • Form 1040 or Form 1040A – not 1040EZ • EIC - Schedule EIC • CTC – Schedule 8812 – for CTC • Workers not raising children can file any form • Eligible workers can claim EIC and CTC refunds for up to 3 previous years
EIC and CTC Rules — What are the Differences?
Who Qualifies for the EIC and CTC? • Workers who are: • Working full-time, part-time or self-employed • Also receiving public benefits • Single or married • Raising a “qualifying child” • Some very low-income workers without a “qualifying child” may be able to claim the EIC • Immigrants legally authorized to work CTC ONLY: • Immigrant workers with Individual Taxpayer Identification Numbers (ITINs) • Some non-custodial parents
Types of Families Who Claim the EIC & CTC • Married and unmarried parents • Step-parents • Grandparents, great-grandparents • Grandparent with child and grandchild • Aunt or uncle • Older brother or sister • Step-brother or step-sister • Half-brother or half-sister • Foster and adoptive parents
Definition of a “Qualifying Child” • If you are a qualifying child, you cannot claim the EIC yourself. • If a child is claimed for both the EIC and CTC, the same worker must claim both credits.
The High Cost of Commercial Tax Preparation • When it’s time to file a tax return, many workers seek • help from a commercial tax preparer. EIC Claimants • Average fees range from $85 - $120 for e-filing.
What are RALs & RACs? Refund Anticipation Loans (RALs) • Very high-interest loans • Interest rate can be > 180 percent; processing fee can be $80 or more • No guarantee refund will equal the loan amount Refund Anticipation Checks (RACs) • Replacing usage of RALs • Temporary bank account established to receive refund and issue as a check • No faster than direct deposit
Are There Alternatives to RALs and Commercial Tax Preparation? Volunteer Income Tax Assistance (VITA) • Free tax filing help for low-income workers at community sites. IRS Toll-free Locator: 1-800-906-9887 • In many communities across the country • Volunteers are trained under IRS guidance • Taxpayers can receive refund in 7-12 days through e-filing • VITA and TCE sites are listed at www.irs.gov (key word search “site list”)
What is Needed to Improve VITA? • Recruit community volunteers to be trained by IRS • Enlist community groups to host additional and more accessible sites • Increase sites offering assistance in languages other than English • Establish more sites that can provide e-filing (IRS will provide software!)
Special Rules & Eligibility for Specific Groups
What if There is a Temporary Absence From the Home? √ • If a worker or child is away from home temporarily due to a special circumstance, it is considered as time lived at home. Examples include time away due to: • Illness • School attendance • Detention in a juvenile facility • Business • Vacation • Military service • Separation in a disaster
What if Two Workers Claim the Same Child? √ Standard rule for resolving duplicate claims: • Parents have priority • Aneligible parent always has priority to claim the creditsover another eligible worker. • An eligible parent can allow another eligible worker to claim his or her child if the other worker has a higher income.
What if Two Workers Claim the Same Child? √ • Unmarried parents • Choose who claims a child, OR • IRS decides between two claims, based on: • Length of residency with child during year or • Highest AGI if residency is the same for each parent • Two or More Eligible relatives • If an eligible parent does not claim, the relative with the highest AGI may claim the child, if that is higher than any eligible parent’s income • If no parent can claim the child, the relative with the highest AGI is eligible Tiebreaker rules for resolving duplicate claims:
Can Immigrant Workers Claim the Tax Credits?√ • To claim the EIC and CTC: • Must meet the income requirements • Child must live with the worker in the U.S. for more than half the year • EIC ONLY: • Worker, spouse and child must each have an SSN that authorizes work • CTC ONLY: • Worker, spouse and child must have either an SSN or ITIN
Are There Special Rules for Native Americans? √ • Same eligibility requirements • Generally, Native Americans pay federal income tax on earnings. • Exception: Income exempt from federal income tax because of a specific treaty, agreement or Act of Congress • For example, tribes in Oregon and Washington have fishing rights established by treaties with the U.S., so income from fishing by tribal members is exempt from federal income tax.
What About Members of the Military? √ • Same eligibility requirements • Military service = temporary absence • Combat pay is considered non-taxable earned income: • For CTC — combat pay counts towards income eligibility • For EIC — can chooseto count combat pay if it is advantageous
What about Non-custodial Parents? √ Non-custodial parent exception for CTC: • If permitted to claim a child as a dependent as part of a divorce or separation agreement, can claim the child for the CTC. • Must attach IRS Form 8332, “Release/ Revocation of Release of Claim to Exemption for Child by Custodial Parent,” to tax return. • Form requires the custodial parent’s signature
What about Married Workers Who Want to File Separate Tax Returns? √ • To claim the EIC, married workers must file a joint tax return. One exception: • A separated parent can claim the EIC without filing a joint tax return with the other parent if: • The parents have lived apart for the last six months of the year. • The child lived with one of the parents for more than half of the year. • That parent paid more than half the cost of maintaining the household for the year and is eligible to claim the child as a qualifying child. • Under these circumstances, the parent living with the child is considered unmarried for tax purposes and can file as “head of household” and may claim the EIC.
Other Important Tax Benefits
American Opportunity Tax Credit √ • Expands & renames Hope Credit • Worth up to $2,500 • 40% of the credit — up to $1,000 — can be claimed even if no income tax is owed • Can be claimed for first 4 years of college
Child and Dependent Care Credit √ • Federal tax credit for expenses to care for a child or a dependent with disabilities in order to work. • Reduces income tax – not a refundable credit • Maximum expenses: • $3,000 for one child, $6,000 for two or more • Credit amount: • 20 - 35% of expenses – depending on income • 28 states also have a credit: • in 13 states the credit is refundable
New Health Insurance Premium Tax Credit • Federal tax credit for the uninsured -- pays a share of health insurance premiums, for coverage in 2014 • Advance Credit - paid monthly in 2014 by IRS to private insurance plan chosen by consumer through Marketplace agency in state • Consumer may have a monthly premium contribution • Advance credit will be reconciled with income shown on 2014 tax return • Most who are now uninsured must get coverage, or pay a penalty to IRS • Those with existing coverage aren’t required to change • Several exemptions from penalty: incl. low income, insurance choices are unaffordable, hardship, ineligible immigrants, Native Americans
Who Qualifies for the New Credit? • Who qualifies for the credit: • Families and individuals with income between 100%-400% of poverty line • Must enroll between Oct. 1, 2013 – Mar. 31, 2014 • How much do people pay? • Consumer premiums: Limited to 2%-9.5% of family income; sliding scale • The premium amount can be adjusted during the year if income or family size changes and is reported to the state Marketplace