VCU NATIONAL TRAINING CENTER EITC and Other Tax Credits / Deductions to Promote Employment,...

VCU NATIONAL TRAINING CENTER


EITC and Other Tax Credits / Deductions to Promote

Employment, Increased Income and Savings

November 2014

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Learning Objectives

After this training, CWICs should be able to:

•Identify and describe the various deductions and credits available to individuals with disabilities and low income working individuals.•Describe how the use of these credits and deductions can increase income and promote financial stability.•Describe how to connect beneficiaries with resources for tax assistance.•Describe the CWIC’s role in providing information about tax issues.

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Warning: CWICs are Not Tax Professionals!

• CWICs can offer very general information about certain tax issues related to Social Security Disability benefits, but the assistance provided should be extremely limited.

• CWICs are not qualified tax professionals and are not trained to assist with tax issues – even those related to Social Security disability benefits. Be very careful NOT to go beyond your very limited I&R role!

• CWICs should refer beneficiaries to the IRS and/or a local tax professional for questions beyond the information contained in this training.

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Tax Credits versus Tax Deductions

• Tax Deductions - reduce the amount of income that is considered taxable.– These may be expenses incurred during the year that are allowed

to be deducted on the income tax return.

• Tax Credits - taken from the portion of the earner’s income that is taxable and result in a "dollar for dollar" reduction in taxes– Tax credits such as the Earned Income Tax Credit are a type of

credit (or benefit) that encourage work and earnings.

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Tax Credits versus Tax Deductions

• Tax credits are often viewed as being more beneficial than tax deductions of a similar value

– Credits reduce the tax directly. – Deductions only reduce income subject to tax. Reducing the taxable

income amount means that the actual reduction isn't as great as the credit allowance and thus, it isn't as valuable as a tax credit.

• Two categories of tax credits:– Refundable credits: reduce the tax below zero (in other words with

this credit a taxpayer may have no tax liability and still receive a refund—for example, as in EITC).

– Non-refundable credits: reduce the tax liability to zero—but no refund is due.

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Promoting Employment and Savings: Earned Income Tax Credit

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What is the Earned Income Tax Credit (EITC)?

• The EITC is a refundable federal tax credit. This means taxpayers may get money back, even if they have no tax withheld.

• The EITC is a tax credit for certain people who work and have earned income under prescribed limits.

• Individuals must file their taxes to receive this refund, even if they do not have any tax liability.

• The amount of the EITC varies based on income and family size.

• If filing for the EITC for the first time, it is possible to claim the credit for a three-year period.

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Maximum Credit Amounts for 2014

– $6,143 with three or more qualifying children

– $5,460 with two qualifying children

– $3,305 with one qualifying child

– $496 with no qualifying children

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EITC Preview of 2014 Tax Year

In 2014, earned income and adjusted gross income (AGI) must be less than:• $46,997 ($52,427 married filing jointly) with three or

more qualifying children • $43,756 ($49,186 married filing jointly) with two

qualifying children • $38,511 ($43,941 married filing jointly) with one

qualifying child • $14,590 ($20,020 married filing jointly) with no qualifying

childrenInvestment income must be $3,350 or less for the year.

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Who is a "Qualifying Child" for EITC?

• Son, daughter, grandchild, stepchild or an adopted child, brother or sister; or a descendant of any of these relations such as a grandchild, nephew or niece.

• Child lives with the taxpayer for more than half the year• Child meets age requirements:

– For EITC, under age 19 or under age 24 if a full time student; or any age if totally and permanently disabled.

• The person did not provide more than half of his/her own support during the year (at minimum six months and 1 day).

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Basic EITC Requirements

• Must have a valid Social Security Number;• Must have earned income;• Filing status cannot be married, filing separately;• Must be a U.S. citizen or resident alien all year, or a

nonresident alien married to a U.S. citizen or resident alien and filing a joint return.

• If there is no qualifying child, the beneficiary must:– be age 25 but under 65 at the end of the year,– live in the United States for more than half the year, and– not qualify as a dependent of another person.

• There are special rules for certain groups which can get complicated!

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Helping Beneficiaries Determine if They Qualify for EITC

• EITC Assistant is an IRS tool to help beneficiaries determine if they are eligible to claim this credit– Go to:

http://www.irs.gov/individuals/article/0,,id=130102,00.html

– Answer a few simple questions to determine:• Eligibility• Determine if children (if applicable) meet the test

for qualifying child• Estimate the amount of the credit

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How EITC is Treated by Social Security Disability Benefit Programs

• Title II benefits never count unearned income or resources. EITC payments would not even need to be reported to Social Security.

• On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (ATRA). The law excludes from income all Federal tax refunds and advanced tax credits received on or after January 1, 2010 – including the EITC!

• The SSI program specifically excludes all EITC payments during income determinations.

• The SSI program also excludes all Federal tax refunds and advanced tax credits as countable resources for up to 12 months. The 12-month period begins the month following the month of receipt of the refund or payment.

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Benefit of EITC

• The money received as a result of the EITC can be used to build asset. By saving the money, or part of the money received as a result of the EITC, beneficiaries can begin to build assets.

– For example, the money received as a result of the EITC could be used to establish a relationship with a financial institution (e.g. Opening a Savings or Checking Account).

• Persons now have the ability to split the refund they receive in up to three different accounts making saving the money easier than ever.

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Why is the EITC Important?

• Helps low-income families substantially increase their annual income.

• Helps to reduce poverty more than any other federal aid program.

• Helps individuals increase savings and reduce debt.• Provides an opportunity to further finance education or

training programs. • Helps to boost local economies by encouraging/increasing

employment.• Has a positive effect on increasing work behavior.

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For More Information about the EITC

The IRS has an entire web page dedicated to the EITC. Go here:http://www.irs.gov/Individuals/EITC-Home-Page--It%E2%80%99s-easier-than-ever-to-find-out-if-you-qualify-for-EITC

24 states and the District of Columbia administered their own state EITCs in 2014. States typically calculate EITCs as a fixed percentage of the federal credit. For factsheets on each state go here:http://www.irs.gov/Individuals/States-and-Local-Governments-with-Earned-Income-Tax-Credit

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Promoting Employment and SavingsChild Tax Credit

Child and Dependent Care Expense Tax Credit

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What is the Child Tax Credit?

• The Child Tax Credit allows certain individuals to reduce their federal income tax by up to $1,000 for each “qualifying child”.

• Each child has to meet 6 qualifying criteria related to age, relationship, support. dependency, citizenship and residence.

• The credit is limited if the modified adjusted gross income is above a certain amount. The amount at which the credit begins to phase out depends on the filing status.

• The Child Credit is generally limited by the amount of tax a person owes. However, if the amount of the Child Tax Credit is more than the tax owed, it may be possible to claim the Additional Child Tax Credit.

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Child Tax Credit Details

• The child must be under 17 (age 16 or younger) at the end of the calendar year.

• The child must be the taxpayer’s natural or adopted son/daughter, stepchild, foster child, sibling, step-sibling or a descendant of these individuals.

• The child must not have provided more than half of his/her support.• The child must be a U.S. citizen, U.S. national, or US resident alien.• The child must have lived with the taxpayer for more than half of the tax

year (with some exceptions).• The credit phase out begins at these points:

– Married filing jointly $110,000– Married filing separately $55,000– All others - $75,000

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What is the Tax Credit for Child and Dependent Care Expenses?

• Allows taxpayers who paid someone to care for a qualifying child, spouse, or dependent a tax credit of up to 35% of the qualifying expenses, depending on adjusted gross income.

• The taxpayer (and spouse if filing jointly) must have EARNED income to claim the credit.

• The care must have been provided so that the taxpayer (and spouse if filing jointly) could work or look for work.

• The payments cannot have been made to a spouse, to the parent of the qualifying person, to someone who was claimed as a dependent, or to a child under 19 by the end of the tax year.

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Child and Dependent Care Tax Credit Details

• The care must have been provided to:– A dependent child who was under age 13 when the care was

provided and lived with the taxpayer for more than half the year;– A spouse who was not physically or mentally able to care for

himself or herself and lived with the taxpayer for more than half the year, or

– A dependent person who was not physically or mentally able to care for himself or herself, and lived with the taxpayer for more than half the year.

• Taxpayers have to identify the care provider on the tax return.• There are some complex rules for this credit – refer to a tax

professional!!

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How these Tax Credits are Treated by Social Security Disability Benefit Programs

• Title II benefits never count unearned income or resources. These tax credit payments would not even need to be reported to Social Security.

• On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (ATRA). The law excludes from income ALL Federal tax refunds and advanced tax credits received on or after January 1, 2010!

• The SSI program specifically excludes all of these Federal tax credit payments during income determinations.

• The SSI program also excludes all Federal tax refunds and advanced tax credits as countable resources for up to 12 months. The 12-month period begins the month following the month of receipt of the refund or payment.

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Why are Credits for Taxpayers with Dependents Important?

Many beneficiaries struggle with the cost of paying for the care Of raising children (or caring for a dependent) and working.• The purpose of the Child Tax Credit is to lower the tax burden

of families who are raising children under the age of 17, whether they are working or not working.

• The purpose of the Child and Dependent Care Credit is to allow the taxpayer (or their spouse, if married) to be gainfully employed. – Offers relief to working people who must pay someone to care for their

children or other dependents. – Available when someone cares for the worker’s dependent child (under

age 13), disabled spouse, or disabled dependent so that the individual or spouse (if married) may work, or look for work.

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Important Deductions/Credits of Interest to People with Disabilities

Impairment-Related Work Expense DeductionsMedical Expense Deductions

Credit for the Elderly and the Disabled

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Impairment Related Work Expense Deductions

IRWE is tax deductable even if it helps reduce the countable Income for Title II or SSI• Deduction is allowed for expenses that enable individuals with disabilities

to work.• These deductions are not subject to the 7.5% limit that applies to medical

expense deductions.• Include the ordinary and necessary business expenses that are:

– Necessary for individual to work satisfactorily,– For goods and services not required or used, other than incidentally,

in your personal activities, and– Not specifically covered under other income tax laws.

• Similar to SSA regulations, the individual must be working to use this deduction.

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Medical Expense Deductions

• Includes medical and dental expenses the individual pays for self, spouse, and dependents (not covered by insurance).

• Also includes the cost of insurance premiums that are paid with after tax dollars (paid out of pocket, such as health, dental or vision insurance).– Examples include the cost of diagnosis, cure, mitigation, treatment, or

prevention of disease and the costs for treatments affecting any part or function of the body.

– Also include costs of equipment, supplies, diagnostic devices, and transportation for needed medical care and payments for medical insurance.

• Individuals can deduct only the amount of medical and dental expenses that is more than 7.5% of adjusted gross income

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Medical Expense Deductions Include:• Medical and Dental Expenses• Artificial limbs, contact lenses, eyeglasses, and hearing aids.• The part of the cost of Braille books and magazines that is more than the

price of regular printed editions.• Cost and repair of special telephone equipment for hearing-impaired

persons.• Cost and maintenance of a wheelchair or a three-wheel motor vehicle• Cost and care of a guide dog or other animal aiding a person with a physical

disability.• Costs for a school that furnishes special education if a principal reason for

using the school is its resources for relieving a mental or physical disability. • Premiums for qualified long-term care insurance, up to certain amounts.• Improvements to a home if the main purpose is medical care. (constructing

entrance or exit ramps). 27



Credit for the Elderly and the Disabled• Helps reduce the amount of tax an individual may owe• To Qualify:

– Must be 65 or older at the end of 2011,– Or under 65 at the end of 2011, and retired on permanent or total

disability.– Received taxable disability income (for 2011).– Are able to claim the credit on Form 1040 or 1040A.

• For individuals with disabilities under age 65– Must be permanently and totally disabled or stopped working because of

the disability– Generally requires a physician’s statement to keep on file for record– Cannot engage in Substantial Gainful Activity (SGA) because of physical or

mental condition that is expected to last for 12 months or result in death and documented by a qualified physician

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Credit for the Elderly and the Disabled: SGA Defined by IRS

• Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit.

• Full-time work (or part-time work done at employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that ability to engage in substantial gainful activity.

• Substantial gainful activity is not work done to take care of oneself at home. It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. However, doing this kind of work may show that an individual is able to engage in substantial gainful activity.

• The fact that an individual has not worked for some time is not, of itself, conclusive evidence that he/she cannot engage in substantial gainful activity.

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Why are Disability-Related Deductions and Credits Important?

• IRWE Deductions:– As with IRWE for SSA benefits, this deduction helps to recoup

the cost of these out-of- pocket expenses related to work• Medical Expense Deductions:

– If medical expenses are high, (must exceed 7.5% of adjusted gross income) will help to alleviate the burden of covering these costs

• Tax Credit for the Elderly or the Disabled– Helps reduce the amount of taxes owed for individuals

receiving employer disability benefits

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More Information about IRWEs as a Tax Deduction

The IRS has a webpage devoted to tax issues related to people with disabilities. Go here for more information:

•http://www.irs.gov/Individuals/More-Information-for-People-with-Disabilities

Also, refer to the handout “Tax Highlights for Persons with Disabilities” for brief summaries of other tax credits or deductions.

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Tax Assistance, Services and Supports for Beneficiaries

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Free Tax Help

• Taxpayers who qualify for EITC have several free options for preparing their returns and Claiming their EITC and other credits, including:

– More than 12,000 free income tax preparation sites nationwide. (Volunteer Income Tax Assistance or VITA)

– Any of the approximately 400 IRS Taxpayer Assistance Centers nationwide.

– Free File through www.irs.gov for internet-enabled do-it-yourselfers.

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Volunteer Income Tax Assistance (VITA) Sites

• VITA sites have IRS trained and certified volunteers sponsored by various organizations.

• Generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Most locations also offer free electronic filing.

• Help low- to moderate-income (generally, $49,000 and below) people who cannot prepare their own tax returns.

• Nationwide Free Tax Preparation Site List can be found at: http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

• Or use the IRS VITA site locator number at 1-800-906-9887

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Free Tax Services

• Publication 910, IRS Guide to Free Tax Services provides a guide to IRS services, resources, education and assistance programs. www.irs.gov/pub/irs-pdf/p910.pdf

• The publication also has an index of over 100 TeleTax topics (recorded tax information) to listen to on the telephone.

• The majority of the information is available free of charge.• Accessible versions of IRS published products are available

on request in a variety of alternative formats for people with disabilities.

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IRS Services for Individuals Needing Assistance —Taxpayer Advocate Service

• Offers free help to guide individuals process of resolving tax problems.

• Taxpayer Advocate Service can help to resolve problems with the IRS if:– The individual’s problem is causing financial difficulties for them

or their business,– The individual or business is facing immediate threat of adverse

action,– Individual has attempted to contact the IRS without timely

response.

• TAS services are located in every state, the DC and Puerto Rico.• Services are free• Toll free number 1-877-777-4778 or TTY/TDD 1-800-829-4059.• For more information, visit www.TaxpayerAdvocate.irs.gov

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IRS Services for Individuals Needing Assistance — Low Income Taxpayer Clinics

• The Low Income Taxpayer Clinics (LITCs) serve individuals who have a problem with the Internal Revenue Service and whose income is below a certain level.

• LITCs are independent from the IRS. Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or for a small fee.

• Low Income Taxpayer Clinics receive partial funding from the IRS via the LITC grant program.

• Examples of LITCs are nonprofit organizations that represent taxpayers or refer them to qualified representatives, and clinical programs at accredited law, business, or accounting schools in which students represent low income taxpayers who are having a problem with the IRS.

• Each clinic determines if prospective clients meet the income poverty guidelines and other criteria before it agrees to represent a client.

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Low Income Taxpayer Clinics (LITCs)• LITCs are located in

every state.• To find LITCs in your

state, go to: http://www.irs.gov/advocate/content/0,,id=151026,00.html and click on your state for locations and listings of services.

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Warnings for Low Income Taxpayers!

•Refund Anticipation Checks (RACs) - Consumer advocates say a refund anticipation check is basically a costly short-term loan of the tax preparation fee. Most tax preparers require consumers to pay for that service when the return is filed. But with a refund anticipation check, the preparer agrees to wait and take that fee out of the refund, essentially floating a loan for the cost of that fee to the taxpayer.

•Personal lines of credit -- Several big tax preparers are offering personal loans that they are careful to say are not tied to a tax refund. It's based off of a person's credit, not the size of their tax refund or their status with the IRS. Many of these loans have very high interest rates and additional fees.

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More Warnings for Low Income Taxpayers!

• Payday Lenders and Cash Advances - Offer tax season cash advances with high interest.

– These loans are often pushed more frequently to lower income people and is a form of predatory lending!

– Warn beneficiaries about the costs of using these services. Advise individuals to seek help through VITA sites or other free services offered by the IRS.

– As an alternative, with the option of using e-file and direct deposit. E-filers can receive a refund in about two weeks.

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A Valuable Resource for Organizations:Center for Budget and Policy Priorities

• The Center for Budget and Policy Priorities provides a variety of tools and resources to help organizations get the word out about EITC and other tax credits http://www.cbpp.org/cms/index.cfm?fa=view&id=2505

• Other resources include:– Helpful articles– National Earned Income Tax Credit Outreach Campaign tools and

materials in 21 different languages http://eitcoutreach.org/category/outreach-tools

• There are a number of resources and fact sheets available to promote filing for taxes, using VITA sites, and understanding the various credits

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What is a Work Incentives Counselor’s Role with the EITC and other Tax Credits?

• Inform beneficiaries about the EITC and other tax credits and deductions.

• Provide informational resources and materials.• Help beneficiaries understand how receipt of tax

credits does or does not impact benefits.• Refer them to volunteer or paid tax professionals

for assistance in requesting the EITC and other credits and deductions.

• Remind beneficiaries to report receipt of the EITC to relevant agencies.

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Final Words

1. Don’t assume beneficiaries know that special tax credits or deductions exist – provide information!

2. Make sure you know where to get free tax assistance in your area.

3. Have plenty of informational resources on hand to share.

4. Understand the limits of your role when it comes to tax matters - refer beneficiaries to tax professionals!

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VCU NATIONAL TRAINING CENTER EITC and Other Tax Credits / Deductions to Promote Employment,...

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