ON THE MONEY: Claiming the earned income tax credit
The Earned Income Tax Credit provides a much-needed financial helping hand for Americans who work hard to make ends meet. Millions of workers may qualify for this credit in 2012 due to changes in their marital, parental or financial status. President Ronald Reagan hailed the Earned Income Tax Credit as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” He was right. Last year it lifted 3.3 million children, and an equal number of adults, out of poverty.
The IRS has a wonderful diagnostic tool on its website www.irs.gov to assist persons who earned $50,270 or less in 2012 to see if they qualify. To get the credit, taxpayers need to file a return and specifically claim the Earned Income Tax Credit, even if they aren’t required to file, since the Earned Income Tax Credit is a refundable tax credit.
Generally speaking, the more children a family has, the greater the credit and the maximum credit can be as much as $5891. Sadly, unscrupulous tax preparers have attempted to scam the government by inflating incomes in order to get larger credit amounts, which these preparers invariably keep. A family with three children that earned $6,000 in 2012 would receive $2,710 from the EIC. But if a tax preparer stated on their tax return that their income was $12,000, the EIC becomes $5,410.
If you employ individuals who cook, clean or take care of your children, don’t overlook what have been referred to as “Nanny Taxes.” In a word, if you paid a babysitter or other household service person more than $1,800 in 2012, or more than $1,000 in any quarter last year, you are a household employer and owe the tax, unless that babysitter, maid or cook is your parent, spouse, under-21 child or someone under age 18 whose principal occupation is not household employment; i.e., a student. You must withhold the employee’s share of social security and Medicare taxes unless you choose to pay both the employee’s share and the employer’s share. The taxes are 15.3 percent of cash wages. Your share is 7.65 percent and the employee’s share is 7.65 percent.
You may also be responsible for paying federal unemployment tax if you are a household employer, and this tax is not withheld from your employee’s wages.
As a tax consultant, I get questions such as: “Why didn’t my tax refund go up (or my taxes due go down) when I entered this such and such expense?” For example, I spoke with a gentlemen whose $8,000 gold watch was stolen in 2012, and when he entered that loss into his tax preparation software, his tax due amount did not go down, and he did not understand why. The reason is that casualty losses are only deductible as an itemized deduction if they are in excess of 10 percent of your adjusted gross income. This fellow had an AGI of well over $100,000, so he qualified for zero loss.
In a similar vein, employee business expenses are generally only deductible if they exceed 2 percent of your adjusted gross income, and you itemize. To illustrate, if I had an AGI of $60,000, the only business expenses that I may deduct on my Schedule A are those in excess of $1,200. The same treatment applies to medical expenses, since only those expenses in excess of 7.5 percent of your AGI are deductible on your Schedule A and only if you itemize. That number will go up to 10 percent in 2013.
Got a financial planning question for Greg? You may email him at email@example.com.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.