Make Tax Time Pay Promote the Earned Income Credit and the Child Tax Credit

1
Make Tax Time Pay!Promote the Earned Income
Credit and the Child Tax Credit

• Presentation by
• Organization
• Phone
• Email

2
These days, paydays can be a little scary.
3
What if your work hours are cut or theres a
pink slip inside your pay envelope?
4
But, what if, instead you find youve got a
40 raise!
5
Thats the boost many workers can get by claiming
tax credits theyve earned!!

• The Earned Income Credit can mean extra money for
  many families, for example
• Families raising two children with income between
  11,000 to 16,370 can get 4,400.
• (Not all workers get this amount, but this year
  families can expect, on average, 2,100.)

6
Wait theres more!

• Some families can get Extra Credit through the
  Child Tax Credit!
• A family could qualify for a Child Tax Credit
  worth up to 1,000 per child.
• Workers who earn over 11,000 in 2005 can get a
  refund even if they dont owe income tax,
  (amount is based on a percentage of their income
  above 11,000).

7
The EIC is our most effective anti-poverty tool
for families!

• In 2003, the EIC lifted 4.4 million individuals
  including 2.4 million children out of
  poverty.
• The EIC can turn a 6 per hour job into an 8
  per hour job.

8
(No Transcript)
9
The EIC

• Reduces the tax burden on low-wage workers
• offsets income and payroll taxes
• Supplements wages
• Provides a work incentive

10
The Federal Earned Income Tax Credit in Tax Year
2005
Maximum benefit 4,400
Maximum benefit 2,662
Maximum benefit 399
Two or more children
No children
One child
Note Married couples with income in the phaseout
range qualify for a higher credit than single
parents shown by dashed lines.
11
The credits help workers keep working and care
for themselves and their children.

• Workers use their credits to
• Pay for transportation to the job
• Keep a car in working order
• Cover child care costs
• Help cover medical expenses
• Buy food and other basic needs
• Keep current on rent and utility payments

12
Lets take a closer look at the credits

• How do they work?
• Who is eligible?
• How much are they worth?

13

• How do the credits work?

14
Taxing arithmetic made simple

• Most tax credits are non-refundable they
  simply reduce or eliminate the income tax you
  owe.
• Suppose you owe 500 in income taxes and qualify
  for a non-refundable credit worth 1,200. The
  credit will eliminate the amount you owe but
  you cant get the remaining 700.

15

• How is a refundable credit worth more?
• Suppose you owe 500 in income taxes and qualify
  for a refundable credit worth 1,200. The credit
  will eliminate the amount you owe and the IRS
  will send you a check for the remaining 700.

16

• What if you earn too little to owe any income
  tax at all?
• Suppose you owe no income tax, but you qualify
  for a refundable credit worth 1,200. The IRS
  will send you a check for 1,200 the full
  amount of the credit!

17
What about the EIC and the CTC?

• The EIC is a refundable tax credit.
• Changes in federal law in 2002 made the CTC
  refundable for many low-income families.
• Some families are eligible for both credits.

18
Heres how it can really add up!

• Mary earned 18,000 in 2005 and is raising three
  children under age 17.
• She owes no income tax.
• She gets an EIC worth 3,630.
• She is also eligible to receive a CTC
• refund of 1,050.
• Together they add up to a total tax refund of
  4,680!

19

• Who is eligible?

20
Different credits, different rules

• Who qualifies?
• Income eligibility
• Definition of a qualifying child
• Residence with child
• Eligibility for immigrants
• Forms
• The tax credits and other public benefits

21
Who qualifies for the EIC?

• Full-time or part-time workers, including
  self-employed workers
• Workers who also receive public benefits
• Single or married workers
• Workers raising a qualified child living in
  their home (Very low-income workers do not have
  to have a qualifying child.)
• Immigrants who are legally authorized to work

22
Who qualifies for the Child Tax Credit?

• Same categories as for EIC, but workers must be
  raising at least one qualifying child
• PLUS
• Immigrant workers with Individual Taxpayer
  Identification Numbers (ITINs)
• Some non-custodial parents

23
How much can workers earn for the EIC?

• A worker raising one child, who earned less than
  31,030 in 2005 can get an EIC up to 2,662.
• A worker raising two or more children who earned
  less than 35,263 in 2005 can get an EIC up to
  4,400.
• A worker not raising children, who is between the
  ages of 25 and 64, and earned less than 11,750
  in 2005 can get an EIC up to 399.
• (Income limits for married workers who file
  their taxes jointly are 2,000 higher than these
  amounts)
• Investment income cannot exceed 2,700.

24
How much can workers earn for the CTC?

• Workers who earned more than 11,000 in 2005 can
  get a CTC refund
• CTC income limits are higher than for EIC
• 110,000 for married couples
• 75,000 for single or head of household
• 55,000 married filing separately
• The CTC is worth up to 1,000 per child

25
Earned income What counts?

• Wages, salaries, and tips
• Net earnings from self-employment
• Union strike benefits
• Employer-paid disability benefits
• Military combat pay

26
Earned income doesnt include

• Non-taxable earned income
• Payroll deductions for dependent care or
  retirement plans
• Public benefits
• Social Security, SSI, welfare benefits
• Child Support
• Other taxable income, such as
• unemployment benefits
• alimony
• interest on bank accounts

27
Military Combat Pay A special rule

• Combat pay is non-taxable earned income, but it
  is treated differently than other forms of
  non-taxable earned income.
• Pay to soldiers in a combat zone is counted to
  determine eligibility for the CTC.
• Soldiers may choose to count combat pay in
  determining eligibility for the EIC, if it is an
  advantage.

28
Definition of a qualifying child

• For the EIC
• Child can be a son, daughter, grandchild,
  stepchild, adopted child, brother, sister,
  stepbrother, stepsister (or their descendents) or
  foster children placed by a government or private
  agency
• Child must be under 19 or under 24 if a full-time
  student or any age if totally and permanently
  disabled
• Child must have lived with the worker for more
  than half the year
• (If you are the qualifying child of another
  person, you cannot claim the EIC yourself.)

29
Definition of a qualifying child

• For the CTC
• New Uniform Definition of Qualifying Child
  changed CTC rules
• Rules for CTC now match rules for EIC, except
  child must be under age 17 for CTC
• Child no longer needs to be a dependent for CTC
• If a child is claimed for both the EIC and the
  CTC, the same worker must claim both credits.

30
Residence with child

• A child must live with a worker for more than
  half the year to be claimed for the EIC and CTC.
• Under one exception, a non-custodial parent can
  get the CTC.
• A non-custodial parent who is permitted to claim
  a child as a dependent as part of a divorce or
  separation agreement can claim the child for the
  CTC.
• The non-custodial parent must attach to his or
  her tax return IRS Form 8332, Release of Claim
  for Child of Divorced or Separated Parents,
  which requires the custodial parents signature.
  

31
Temporary Absences

• Time that a worker or child is away from home on
  a temporary absence due to a special circumstance
  is considered as time lived at home. Examples
  include
• Illness
• School attendance
• Detention in a juvenile facility
• Business
• Vacation
• Military service

32
Resolving duplicate claims for a child
Tie-breaker rules

• An eligible parent always has priority to claim
  the credits over another eligible worker.
• Unmarried parents who are each eligible can
  choose which parent claims a child.
• Claims by two eligible relatives are decided by
  the IRS based on which relative lived longest
  with the child during the year.
• If each lived with the child the same amount of
  time, the relative with the highest adjusted
  gross income receives the credits.

33
Rules for immigrant workers

• Immigrant workers can get the EIC
• must meet the income requirements
• child must live with the worker in the U.S. for
  more than half the year
• worker, spouse and child must each have an SSN
  that authorizes work
• Immigrant workers can get the CTC
• must meet the income requirements
• child must live in the U.S.
• worker, spouse and child must have either an SSN
  or an Individual Taxpayer ID Number (ITIN)

34
Native Americans and the tax credits

• Eligibility requirements are the same as for
  other families and individuals.
• Generally, Native Americans pay federal income
  tax on earnings.
• However, income which is exempt from federal
  income tax because of a specific treaty,
  agreement or Act of Congress does not count as
  earned income for the EIC or the CTC.

35
How do you claim the credits?

• You must file a tax return!
• Families must file either Form 1040 or 1040A
  not the 1040EZ and they must attach Schedule
  EIC for the EIC and Form 8812 for the CTC.
• For the CTC, in rare cases in which the child is
  not a dependent, new Form 8901 is also needed to
  claim the CTC.
• Workers not raising children can file any form
  for the EIC 1040EZ is OK.
• Workers who did not take advantage of the EIC in
  the past, but were eligible to do so, can claim
  it for up to three past years.

36
The tax credits and other public benefits
Income

• EIC not income for specified federal programs,
  including food stamps, SSI, public housing,
  Medicaid states determine whether EIC counts for
  other programs including TANF, child care, energy
  assistance.
• CTC not income for any federal, state or local
  program financed even in part with federal funds.

37
The tax credits and other public benefits

• Resources
• Rule for most benefit programs
• EIC and CTC refunds not counted as a resource
  during the month the refund is received and the
  following month
• Exceptions
• Food stamps EIC not counted as resource for
  12 months
• SSI EIC and CTC not counted as a resource for
  9 months
• States can determine rule for TANF
• Savings in IDAs not counted as resource

38
Want to get the most out of every paycheck?

• Workers raising children can get the Advance EIC
  in their regular paycheck by filing a W-5 with
  their employer.
• Part of the EIC is added to each paycheck for
  workers paid on a bi-weekly basis, as much as
  125 per month extra take-home pay!
• Workers can get a year-end refund too!

39

• Workers should not choose the Advance EIC if
  they
• Hold more than one job
• Have a working spouse, unless both spouses take
  the Advance EIC
• Expect a big increase in income during the year
  (new job, marriage to someone who also works)
• Could end up not eligible for the EIC and have
  to pay money back to the IRS

40

• Workers cannot get the Advance EIC if they
• Do not have qualifying children
• Get paid day by day
• Do not have Social Security and Medicare taxes
  withheld from their pay

41

• How much can families get from the EIC?

42
EIC Benefits for Tax Year 2005at Various Income
LevelsThis is not a tax table. Do not use this
table to complete income tax returns.
43
The Federal Earned Income Tax Credit in Tax Year
2005
Maximum benefit 4,400
Maximum benefit 2,662
Maximum benefit 399
Two or more children
No children
One child
Note Married couples with income in the phaseout
range qualify for a higher credit than single
parents shown by dashed lines. 39
44
How much can a family get from the CTC?

• Depends on the amount of taxable earned income
  above 11,000.
• Depends on the number of qualifying children
  under age 17.
• Worth up to 1,000 for each qualifying child
  under age 17.

45
How does the CTC work?

• The CTC is first used to reduce or eliminate any
  income tax the family may owe. They may be able
  to get all or part of any remaining CTC as a
  refund.
• The family can get whichever is LESS
• The amount of the CTC that remains after their
  income tax is eliminated, OR
• 15 percent of the familys taxable earned income
  over 11,000.

46
Huh? I dont get it. . .Lets try an example

• Maxine is a single mom raising a 12-year-old
  child. She earns 15,000 and owes 130 in income
  tax. Maxines maximum possible CTC is 1,000.

47

• A. The CTC is first used to eliminate the taxes
  she owes. She has 870 of the CTC remaining.
• 1,000 - 130 870
• B. The amount of Maxines earnings over 11,000
  is 4,000. Fifteen percent of this amount is
  600.
• 15,000 - 11,000 4,000 and
• 4,000 x 15 600
• Maxine can get the lesser of A and B.
• In this case, 600.

48
Waittheres more!

• Maxine is also eligible for an EIC of 2,562.
• So, her total refund comes to 2,562 plus her
  600 CTC 3,162!

49
Lets try another example

• Mike and Tanya Smith are married and are raising
  two children under age 17. They earned 25,000
  and owe income tax of 220. Their maximum
  possible CTC is 2,000.
• A. The CTC is first used to eliminate the taxes
  they owe. They have 1,780 of the CTC remaining.
• 2,000 - 220 1,780
• B. The amount of the Smiths earnings over
  11,000 is 14,000. Fifteen percent of this
  amount is 2,100.
• 25,000 - 11,000 14,000 and 14,000 x 15
  2,100

The Smiths get the lesser of A and B. In this
case, 1,780
50
Wait theres more, again

• The Smiths also qualify for an EIC of 2,583.
  Added to their CTC of 1,780, this brings their
  total refund to 4,363!

51
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
• between 20 and 35 of expenses depends on
  income
• 27 states also have a credit. In 12 states the
  credit is refundable.

52
Rules for Families Hurt by Katrina

• September 2005 legislation
• Applies to workers who lived in Katrina disaster
  counties as of August 28, 2005
  www.fema.gov/news/disasters.fema
• In cases where earned income in 2005 is lower
  than in 2004
• Higher 2004 earned income amount can be used to
  claim EIC and CTC refund

53
Rules for Families Hurt by Katrina

• Using the higher 2004 income will help very
  low-income workers get a larger EIC
• Moderate-income workers should calculate using
  both income amounts to see which provides the
  larger refund
• The amount chosen is used for both EIC and CTC
• 2005 earned income is used to calculate how
  much income tax is owed

54
The high cost of commercial tax preparation

• When its time to file a tax return, many
  workers seek help from a commercial tax preparer.
• 70 percent of EIC claimants use commercial tax
  preparers.
• Average fees range from 85 - 120 for
• e-filing.

55
Why would I not want a quick refund?

• Quick Refunds are risky
• Very high-interest loans (can be over 180 percent
  interest rate)
• Can be an additional 80 fee or more
• Some preparers charge a percentage of the EIC
  refund, driving fees even higher
• No guarantee refund will equal the loan amount

56
Promote free tax preparation assistance

• Provide alternative to commercial tax preparers
• Volunteer Income Tax Assistance (VITA) provides
  free tax filing help for low-income workers at
  community sites.
• Expand and improve VITA
• Recruit community volunteers to be trained by
  IRS.
• Community groups needed to host additional sites
  more accessible sites.
• More sites needed that can provide e-filing (IRS
  will provide software!).

57
Outreach efforts are needed to ensure eligible
workers know about the tax credits and how to
claim them

• You do NOT have to be a tax expert to help
  families claim their credits.
• You can incorporate outreach activities into your
  routine work and encourage your partners to
  do the same.

58
Why is outreach needed?

• The eligible population is ever-changing,
  especially in a changing economy
• Workers not eligible in the past who lose their
  jobs mid-year could become eligible.
• Workers just entering labor force may not know
  about the credits.
• Some groups are at greater risk of missing out on
  the tax credits.

59
Who is at risk of missing out on the EIC and CTC?

• Workers not required to file returns
• 15,900 for a couple 10,250 for head of
  household 7,950 for a single filer (2004)
• New employees employees making the transition
  from welfare to work
• New parents including foster and adoptive
  parents
• Divorced or separated custodial parents

60
Promoting the credits

• Alert families about the EIC and CTC and provide
  the basic information they need
• Eligibility information
• Tax forms
• Where to go for free tax filing assistance
• Help getting an SSN or ITIN

61

• Build partnerships to connect with eligible
  families and individuals
• Nonprofit health and human services providers
• Community organizations and institutions
• Faith-based groups
• Civic/service organizations
• Labor unions
• State and local government agencies (esp. public
  benefits)
• Employers and local businesses
• Media
• IRS

62

• Make special efforts to
• Demonstrate how the credits can help workers meet
  other goals (paying back bills, transportation to
  work, future homeownership)
• Address language and literacy concerns
• Integrate outreach activities with partners
  routine activities
• Increase the availability of free tax filing
  assistance and improve service
• Consider a comprehensive approach to helping
  families obtain benefits they need

63

• Spectrum of Outreach Approaches
• Building a Tax Credit Outreach Campaign

Distribute tax credit info and direct workers to
free tax filing
Conduct outreach events and create opportunities
to file
Get in position to enrich and sustain outreach
efforts in the future
Expand and improve free tax filing sites
Engage others in reaching out through their own
networks
64
Step 1 Distribute tax credit information and
direct workers to free tax filing sites

• ABC Head Start sponsors 20 centers in churches,
  a housing project, schools and a community
  college. The program conducts parenting classes,
  including special sessions just for fathers. As
  part of classes focusing on family finances,
  information on the EIC and CTC and where to get
  filing assistance is distributed.

65
Step 2 Engage others in reaching out to workers
in their own networks

• Many parents of the children enrolled in ABC
  Head Start are employed at minimum wage at a
  local textile factory. ABC staff provides the
  company with posters and paycheck stuffers so
  they can inform their entire workforce about the
  credits. This initiative gets the attention of
  the Chamber of Commerce, which agrees to print a
  supply of materials and promote their use among
  all Chamber members.

66
Step 3 Conduct outreach events and create
opportunities to file returns

• The Community College that houses two of ABCs
  Head Start classrooms is planning its yearly job
  fair. ABC staff offer to set up a table at the
  fair to provide EIC and CTC outreach materials.
  They also invite volunteers from a local VITA
  site to be on hand at a pre-arranged time to
  prepare tax returns.

67
Step 4 Expand and improve free tax filing sites

• The free tax filing event was so successful that
  the following year the Community College trains
  accounting students to be VITA volunteers. The
  college opens five new sites adjacent to Head
  Start centers around the city. Head Start staff
  and parents volunteer to provide child care
  evenings and weekends for families while their
  taxes are being prepared.

68
Step 5 Get in position to enrich and sustain
outreach efforts in the future

• As planning for next years job fair gets
  underway, materials about the tax credits are
  included in the orientation packets that go to
  all participating employers, along with a letter
  from the college president and Chamber of
  Commerce director urging them to promote the
  credits to their employees. In addition, TV,
  radio and print advertisements for the fair will
  promote the opportunity to get free tax help.