Monday, January 31, 2011

Making sense of EITC…


As the tax filing season gets into full swing, you are likely to hear the acronym EITC more frequently. What is EITC? It stands for Earned Income Tax Credit. If you filed taxes last year, you may be familiar with this credit, but you should also know that there have been some changes due to all of the recent laws passed. In true tax fashion, the details of qualification can become a bit mind numbing when you sort through the IRS details. To prevent mental meltdowns I thought it might help to summarize the information in more user friendly language.

Before we get into the actual qualifying factors, let’s briefly review a few things you might want to keep in mind. First, if you qualify for an EITC you are very likely also eligible for free tax preparation services. Second, if you currently receive assistance from the government from programs such as Medicaid, Food Stamps and other subsidy programs, claiming the EITC should not impact your qualification for these programs. Third, if you claimed this credit and used the previously available advanced payment feature you are out of luck this year. Due to the changes in the laws this option is no longer available. You will still earn the credit for your tax filing, but will not be able to enjoy the advance on the qualifying credit total.

Who qualifies for the EITC? If you want to do a little pre-screening, you can check out the EITC Assistant tool on the IRS website. If you don’t have time to utilize this tool, check out the summary list below for a quick review of the basics. As always, check with your tax preparer or the IRS information sources for the full scope of information. This list is intended to provide an at a glance review only.

Before you can claim the EITC you MUST meet the qualification requirements and file a tax return. If you do not usually file a tax return due to your gross income levels you will need to start a new trend or pass on the credit. No filing = No credit!
  • If you do not have earned income (a paycheck) for last year, you will not be able to claim this credit. It is an Earned Income Tax Credit. If you did not participate in the earning process, you cannot enjoy the credit benefits. Just like the Lotto, you have to play to win!
  • Do you have a valid Social Security Number (SSN)? If yes, then you can continue on with your credit claim journey.
  • Do you have investments (example: stocks) that earn you income? If these investments earned you $3101.00 or more throughout the year you will not qualify for this credit.
  • Married? Congratulations! Be sure you file as a married couple and not separately or you will not qualify for this credit.
  • The EITC is available to US Citizens and/or resident aliens only. If your citizenship status is anything other than these two categories, you may not qualify for this credit.
  • If your parents are including you, their child, in their qualification for EITC you cannot claim the credit for yourself.
  • Do you file Form 2555 or Form 2555-EZ? If yes, you can stop reading. You will not qualify for this credit.
  • Your earned income and adjusted gross income (AGI) MUST meet the qualification limits based on your marriage and parenting credentials. (If you are married and how many kids you have…)
  • Are you claiming a child on your taxes? To qualify for this credit they must meet certain criteria, as well. (see below)
  • Were you at least 25 years of age at the end of 2010? Were you 60 years of age or younger at the end of 2010? If you answer, “yes”, to either of these questions you are meet the age criteria. If not, you may not qualify for the credit.
  • Does someone claim you on their taxes as a dependant? If so, you will not qualify for this credit.
  • Did you reside in the United States for at least half of the year? If yes, then you can continue in your qualification quest. If no, you are not likely to be eligible.

Income Qualification Ranges:
For the 2010 Tax Year, earned income and AGI must each be less than the following to qualify:
  • If you have 3+ qualifying kids… $43,352 ($48,362 if you are married and filing jointly)
  • If you have 2 qualifying kids… $40,363 ($45,373 if you are married and filing jointly)
  • If you have 1 qualifying kid… $35,535 ($40,545 if you are married and filing jointly)
  • If you have 0 qualifying kids… $13,460 ($18,470 if you are married and filing jointly)

Child Criteria for Credit Qualification:
The child must have lived with you in the US for more than 6 months of the year.
  • You must be able to prove the relationship status of the child you are claiming. Qualifying relationship status includes your natural child (son or daughter), stepchild, foster child, adopted child, natural sibling (brother or sister), step-siblings, or a descendant of any of these (grandchild, etc).
  • Was your child 19 years of age or younger at the end of 2010? If yes, you meet the age requirement.
  • Was your child a full-time student under the age of 24 at the end of 2010? If yes, you meet the age requirement.
  • Was your child permanently and totally disabled at anytime during 2010? If yes, you should meet the age requirement.
  • Unless the child you are claiming is permanently and totally disabled, they must be younger in age than the person claiming them in order to qualify.
  • Did your child file a joint return? If so, then they may not qualify for you to claim them.

EITC Maximum Tax credits for 2010:
  • If you have 3+ qualifying kids… $5,666
  • If you have 2 qualifying kids… $5,036
  • If you have 1 qualifying kid… $3,050
  • If you have 0 qualifying kids… $457

Common Errors to Watch For:
  • If you are claiming a child in the qualification for this credit, be sure that they meet the necessary criteria.
  • If you are legally married, filing as “single” or “head of household” will harm your chances of qualifying.
  • Be sure the income your report is 100% accurate!
  • Double check the SSN details for you and your children. Typo errors and/or missing information could cause trouble in qualifying for this credit.

Military Special Circumstances:
If you are an active member of the military and received Combat Zone Pay you may enjoy some flexibility in your AGI. As you prepare your taxes, review whether or not including your Combat Zone Pay helps to qualify you for a larger credit and/or if it pushes your income above the qualification threshold. If it pushes you past the threshold, you may have the option to not include it. If it helps you to receive a higher credit, you may want to include it. Just remember that the inclusion of Combat Zone Pay is an all or nothing option. As always, check with the IRS or your tax preparer for the full scope of impact on this detail. 


Monday, January 17, 2011

Tax Penalties on the Rise


There has been a lot of chatter about changes in the tax rules and regulations in the past year. Regardless of personal feelings on the matter we are all in the same boat of compliance trying to keep from going over the proverbial waterfall. For business owners the navigation of these new rules is two-fold. Like the rest of us, they have to be sure that their personal filing is accurate, but they are also faced with ensuring that their business reporting is spot on. With this in mind, I thought that a little information sharing might be in order to inspire a little more diligence in us all as we prepare our taxes this year.

Did you know?
A failure to file accurate information returns now results in a penalty of $100 per return (an increase from $50)

A failure to file can now cost up to $1.5 million (increased from the $250,000 maximum)

For corrected returns filed within 30 days, the fee is now $30 per return (up from $15)

Organizations filing corrections within 30 days may be subject to a maximum of $250,000 (increased from $75,000)

Corrections filed more than 30 days after the due date, but prior to August 1st is now $60 per return (up from $30 per return)

Organizations issuing corrections more than 30 days past the due date, but prior to August 1st, can face penalties up to $500,000 (up from $150,000)


Have an organization (small business) with gross receipts of $5 million or less?
A failure to file penalty can result in a maximum fine of $500,000 (increased from $100,000)

Corrections issued within 30 days may be fined a maximum of $75,000 (increased from $25,000)

Corrections issued 30 days or more past the due date, but prior to August 1st, can be fined a maximum of $200,000 (increased from $50,000)


Interested in a few more details? 

Monday, January 10, 2011

Friendly Reminders for Tax Time

Yes, I realize there is a certain level of irony using the word "friendly" in the same header sentence as  the word "tax", but I swear this information is benevolent! Due to a variety of legislative and calendar adventures this year, the 2010 tax filing details are a little different than previous years. With all of these changes in mind, I thought it might be nice to share a few information tidbits to help you file on time and avoid unnecessary headaches.

1. Due to a calendar conflict with the Emancipation Day holiday, 2010 tax filing is due by April 18, 2011 - not the usual April 15 deadline.

2. If you prefer to file your return in a paper format, remember that the IRS is not mailing tax packets to tax payers this year. You can still obtain these packets at your local IRS Office as well as participating Libraries and Post Office locations. Forms can also be downloaded and printed from the IRS website

3. If your annual income was less than $49,000 for 2010 you can get your tax preparation completed for free! Check out the Volunteer Income Tax Assistance program for details. 

4. If you are 60 years of age or older you can make use of free tax counseling and basic preparation services through a program called Tax Counseling for the Elderly

5. If your adjusted gross income is $58,000 or less for 2010, you can e-file your taxes for free using the traditional version of the Free File software.

6. Interested in filing electronically, but don't need the software? You can also use Free File Fillable Forms to e-file your 1040, 1040 A and 1040EZ return.

7. If you are being paid to prepare a tax return for another person, be sure to obtain your PTIN. (Preparer Tax Identification Number). The 2010 filing is the first year that this is required.

8. If you maintain financial accounts in foreign countries, be aware that the IRS has taken additional steps to ensure that appropriate taxes are paid on these funds. 

9. Due to tax change legislation signed in 2010, people who include certain forms in their filing will be required to wait until mid-to-late February before they can complete and file their tax forms. The delay is designed to allow the IRS ample time to reprogram its processing systems to ensure that they can properly process filings with these changes. Who does this apply to? Anyone who: Claims itemized deductions on Schedule A; Claims the Higher Education Tuition and Fees Deduction; Claims the Educator Expense Deduction. The official date of acceptance by the IRS for tax filings including these claims is still pending, but will be announced. 

10. If you do not fall into the category of people who must wait until mid-to-late February to file their taxes, you can submit your completed forms to the IRS as early as January 14, 2011