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Low- and moderate-income workers may be eligible for the refundable earned income tax credit (EITC). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, and immigration and work status in the U.S. The amount of the EITC is based on the presence and number of qualifying children in the worker's family, as well as on adjusted gross income (AGI) and earned income. The latter is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.
An individual may claim a tax credit for each qualifying child under the age of 17. The amount of the credit per child is $1,000 through 2010 and $500 thereafter. A child who is not a citizen, national, or resident of the U.S. cannot be a qualifying child.
The credit is phased out for individuals with income over certain threshold amounts.
The credit is allowable against the regular tax and the AMT. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount (the "earned income" formula). The threshold dollar amount is $12,550 (for 2009), and is indexed for inflation.
The Recovery Act provides eligible individuals with a refundable income tax credit for tax years beginning in 2009 and 2010. The credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 for a joint return).
For these purposes, the earned income definition is the same as for the earned income tax credit with two modifications: (a) it does not include net earnings from self-employment which are not taken into account in computing taxable income; and (b) it includes combat pay excluded from gross income.
The credit is phased out at a rate of 2% of the eligible individual's modified AGI above $75,000 ($150,000 for a joint return).
Observation: Thus, the credit phases out completely at modified AGI of $95,000 ($190,000 on a joint return).
The credit is reduced by any payment received by the taxpayer under Recovery Act Sec. 2201 or any credit allowed to the taxpayer under Recovery Act Sec. 2202 (these are recovery payments under the Veterans Administration, Railroad Retirement Board, and the Social Security Administration and credit for certain government workers). The failure to reduce the making work pay credit by the amount of such payments or credit, and the omission of the correct TIN (see below), are clerical errors. This allows IRS to assess any tax, resulting from such failure or omission without the requirement to send the taxpayer a notice of deficiency allowing the taxpayer the right to file a petition with the Tax Court.
An eligible individual is any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another may claim a dependency deduction for a tax year beginning in a calendar year in which the eligible individual's tax year begins; and (3) an estate or trust. An individual is not eligible if he does not include his social security number on the return. For joint filers, this requirement is met if the social security number of one of the spouses is included on the return.
Any credit or refund allowed or made to an individual under this provision is not taken into account as income and is not taken into account as resources for the month of receipt and the following two months for purposes of determining eligibility of the individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.
It is anticipated that taxpayers' reduced tax liability under the provision will be expeditiously implemented through revised income tax withholding schedules produced by IRS. These revised schedules should be designed to reduce taxpayers' income tax withheld for each remaining pay period in the remainder of 2009 by an amount equal to the amount that withholding would have been reduced had the provision been reflected in the income tax withholding schedules for the entire tax year.
Return to American Recovery and Reinvestment Tax Act of 2009 overview page.
Posted: February 15, 2009