Do You Qualify for the Earned Income Tax Credit?

As a small business owner, you could qualify for the Earned Income Tax Credit!  It's different than itemized deduction and available for those that qualify with or without children.

What is the Earned Income Tax Credit?
By Maurie Backman on Fool.com

Taxes can be a huge burden for low-income Americans who need every penny they can get to pay the bills. Thankfully, there are tax credits available to help lower earners make ends meet. One such credit is the Earned Income Tax Credit. The Earned Income Tax Credit, or EITC, is a federal tax credit that can save eligible low-income Americans money on their taxes. You must meet certain criteria to file for the EITC, but if you qualify, you could receive up to $6,318 for 2017. Best of all, the EITC is refundable, which means that if it reduces your tax liability to $0, you'll actually get a check for the difference.


Tax credits versus deductions

Some people use the terms "tax credit" and "tax deduction" interchangeably, but in reality, they're not the same thing. A tax deduction reduces your taxable income, while a tax credit is a dollar-for-dollar reduction of your tax liability. If you're eligible for a $3,000 tax deduction and your effective tax rate is 25%, that deduction will save you $750 in taxes. But if you get a $3,000 tax credit, it'll save you $3,000 in taxes.

Now many tax credits are non-refundable, which means that if they reduce your tax liability to $0 with money left over, you won't be eligible to receive the difference. The EITC, however, is refundable, which means that it has the potential to put even more money back in your pocket. Let's say you owe $2,000 in taxes but are eligible for an EITC credit in the amount of $3,400. Because the EITC is refundable, you'll actually get a check for $1,400.

How do I get the Earned Income Tax Credit?

There are certain criteria you must meet to be eligible for the EITC. To qualify, you must have earned income from a job or business that you own. Furthermore, your tax filing status must be single, married filing jointly, head of household, or qualifying widow. Additionally, for 2017, your investment income for the year can't exceed $3,450.

There are also income limits that determine your eligibility to receive the Earned Income Tax Credit, and they depend on the number of qualifying children you have in your household. The following table shows what the 2017 EITC income limits are based on your tax filing status and number of qualifying children:

How much can I get from the Earned Income Tax Credit?

The amount of money you get from the EITC depends on your income and number of qualifying children. For 2017, the maximum you'll receive from the EITC is:

• $6,318 if you have three or more qualifying children
• $5,616 if you have two qualifying children
• $3,400 if you have one qualifying child
• $510 if you don't have any qualifying children

Don't pass up free money

To benefit from the Earned Income Tax Credit, all you need to do is claim it on your tax return. Surprisingly, an estimated 20% of eligible tax filers fail to claim the EITC and lose out on much-needed money each year as a result. If you're a low earner, it pays to see whether the Earned Income Tax Credit could lower your taxes or, better yet, put extra cash back in your pocket this year.

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Premium Tax Credits Being Reviewed by IRS

An article on AccountingToday.com, by Michael Cohn, recently highlighted how the IRS has been advised to review the Premium Tax Credits due to the fact that "the IRS is unable to ensure that individuals claiming the PTC met the most important eligibility requirement: that insurance was purchased through an exchange."  The IRS has updated procedures to spot fraudulent claims, but not without stretching its resources.

IRS Miscalculating Tax Credits for Obamacare
By  Michael Cohn

The Internal Revenue Service’s computer systems miscalculated the allowable Premium Tax Credits for more than 27,000 taxpayers who received subsidies for health insurance under the Affordable Care Act, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, evaluated the effectiveness of the IRS’s verification of health care tax credit claims during the 2015 filing season. According to the IRS, almost $11 billion in Advance Premium Tax Credits were paid to insurers in fiscal year 2014.  As of June 11, 2015, the IRS processed more than 2.9 million tax returns involving the Premium Tax Credit, and taxpayers received approximately $9.8 billion in PTCs that were either received in advance or claimed at filing.

The ACA requires health insurance exchanges to provide the IRS with information regarding individuals who are enrolled by the exchange on a monthly basis. The data is referred to as Exchange Periodic Data, or EPD. TIGTA’s analysis of more than 2.6 million tax returns with a PTC claim that were filed between January 20, 2015, and May 28, 2015, for which the IRS had EPD, found that the IRS accurately determined the allowable PTC on more than 2.4 million (93 percent) returns.

TIGTA said, however, that it is continuing to work with the IRS to determine the cause for calculation differences in 150,385 of the remaining 182,884 (7 percent) tax returns. Computer programming errors resulted in an incorrect computation of the allowable PTC for 27,827 tax returns. For 4,672 tax returns, the IRS did not have the authority to correct the PTC claim during processing.

The Affordable Care Act created the health insurance marketplace, also known as an exchange. The exchange is where taxpayers find information about health insurance options, purchase qualified health plans, and, if eligible, obtain help paying premiums and out-of-pocket costs. The ACA also created a new refundable tax credit, the Premium Tax Credit, to help offset the cost of health care insurance for those with low or moderate income. Individuals can receive the PTC in advance or can claim the PTC on their tax return. Individuals who received the PTC in advance are required to reconcile the amount paid on their behalf to the allowable amount of the PTC on their tax return.

The House Committee on Appropriations requested that TIGTA evaluate the IRS processes to ensure that unauthorized payments or overpayments of the PTC are fully recouped.

The exchanges did not provide the EPD to the IRS prior to the start of the 2015 filing season as required. In addition, IRS system issues prevented the IRS from being able to use most of the EPD received between Jan. 20, 2015, and March 29, 2015, according to TIGTA.

Without the required EPD, TIGTA noted, the IRS is unable to ensure that individuals claiming the PTC met the most important eligibility requirement: that insurance was purchased through an exchange. TIGTA’s analysis of tax returns filed between Jan. 20, 2015, and May 28, 2015, identified 438,603 tax returns for which the IRS did not have EPD at the time the tax returns were processed or the EPD were incorrect.

“The IRS did develop manual processes in an effort to verify Premium Tax Credit claims associated with Exchanges that did not provide the required Exchange Periodic Data,” said TIGTA Inspector General J. Russell George in a statement. “However, these processes resulted in the IRS having to suspend tax returns during processing, which uses additional resources and increases the burden on taxpayers entitled to these claims.”

TIGTA verified that the IRS processes to identify potentially fraudulent PTC claims are operating as intended. In addition, the IRS corrected programming errors identified by TIGTA that resulted in tax returns not being identified for further review during processing.

TIGTA recommended the IRS review the 27,827 tax returns that TIGTA identified to ensure that these individuals receive the correct PTC, and that the IRS modify the income and family size verification processes to use the most current information available when determining if a taxpayer has reconciled APTCs received in the prior calendar year.

The IRS agreed with both of TIGTA’s recommendations and said it will review the 27,827 tax returns to prioritize them against existing workload demands and resource constraints so that they may be addressed accordingly. The IRS also said that implementation of agreed changes to the income and family size verification process is subject to budgetary constraints, limited resources and competing priorities.

“For those 27,827 returns where the PTC claim may have been incorrectly verified, due to the reliance on projected partial-year data and programming errors, it is important to note that the IRS does not have statutory authority to correct discrepancies without following deficiency procedures,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Deficiency procedures, also known as audit procedures, are costly and compete with other enforcement priorities for scarce resources. We will review those returns to identify those that merit appropriate follow-up activity.”

For the full article, click here.

Which Education Deduction/Credit Works Best for You?

When thinking about education expenses when filing your 2015 tax return there are basically 3 options. There are two tax credits available to those who have paid expenses for higher education in 2015. They are The American Opportunity Credit and the Lifetime Learning Credit.  The third option is claiming your tuition and fees as a deduction.  Where a tax deduction reduces only your taxable income, claiming one of the credits reduces your bill by the actual credit amount  Only one of these credits can be claimed for a qualifying student, you cannot claim both in the same year.  However, if you have paid education expenses for two students, these credits can be claimed on a per-student, per-year basis!  As with any accounting, it’s all in the math.  A lot of people will be better off claiming the credits and reducing their bill outright. Whereas making deductions might still land you in the same tax bracket, barely making an impact.  Ultimately, the bottom line will always tell you which is the best way to go.

Here is a guide to which option may be best for you:

Tuition and fees deduction

You are allowed up to a $4,000 deduction and you don’t even have to itemize them.  The deduction is for the taxpayer, not the student.  If there are multiple students in the household, this may not be the most beneficial

American Opportunity Credit

You are allowed up to $2,500 credit per eligible student, therefore, if you have two students in the household you could receive a $5,000 credit off of your final tax bill.  The American Opportunity Credit is only available for the first 4 years of any student pursuing an undergraduate degree and needs to be enrolled at least half-time during one academic period to qualify.  All of your tuition and required enrollment fees are qualified expenses along with any course materials and supplies needed and don’t have to be purchased from the institution in order to qualify.

Lifetime Learning Credit

This allows up to $2,000 credit per return— not student.  So only one Lifetime Learning Credit can be claimed per tax year no matter how many qualifying students.  However, the advantage of this credit is that you can claim it for any post-secondary education and it applies to all courses that help acquire or improve job skills.  It is not necessary to be pursuing a degree or other recognized education credential.  All qualifying expenses include tuition and enrollment fees, and course materials, supplies and equipment purchased from the institution.

No matter what your situation, these are three great tools to use to whittle down tax liability, and for good reason. These days education can be expensive so take advantage of all the help you can get!