Earned Income Credit Qualification: The Basics and General Information

Earned income credit is a type of credit that can be taken on a tax return which reduces tax liability for a taxpayer whose amount changes depending on the number of dependents that person has as well as on their income level. Earned income credit was first begun to help lower income taxpayers and families. Since the earned income credit is refundable, people who qualify for a larger credit than the amount of tax withheld for the year, receive the excess as a tax refund. Tax experts can help taxpayers see if they qualify for these credits.
To qualify for an earned income credit, both the adjusted gross income and earned income have to be below a certain threshold. Adjusted gross income is basically your gross income with some special reductions such as certain business expenses or health savings account deductions taken out. When verifying eligibility for earned income credit, this amount must be calculated as well as earned income from a job, business or farm. There are also limits to the amount of investment income one makes when trying to qualify for an earned income credit. All these must be first calculated and compared to eligibility limits in order to qualify.
Another aspect that requires qualification is dependents. An earned income credit allows for qualifying children to be claimed, but not other dependents such as relatives. Some children qualify as dependents but not for an earned income credit and vice-versa. There are specific tests to pass in order to claim these children based on age, relationship, residency, and whether or not the child filed a joint return.
The children who are being claimed for an earned income credit must also possess a valid social security number. You cannot claim the credit without this number. Also, the status: Married Filing Separately status is not allowed to take the earned income credit. However, those couples who have been separated for over 6 months in different residences may use the Head of Household status to claim the credit. For more information or help with filing, contact our tax company for affordable tax preparation and other tax services.

Earned Income Credit Qualifications

The Earned Income Credit is a benefit for people with low to moderate income levels. It’s designed to help working families save money. The income level limits are scaled based on income and number of qualifying children. For instance, an unmarried individual with an income over $14,340 would not be able to claim the credit, but an unmarried individual with an income less than $37,870 and one qualifying child would be able to take the credit. The credits allow for a maximum of $6,044 for individuals or married couples with three or more qualifying children, to $487 for individuals with no children. Across all of the different types of dependent qualifications and income levels, the investment income must be less than $3,300.

Taxpayers must be mindful when applying for the Earned Income Credit. They must not be qualifying as a dependent on someone else’s return. They must file any type of foreign earned income tax return. They must have a qualifying dependent or else be over 25 and under 65, have lived in the US for more than half a year. If you apply for the Earned Income Credit and are denied, you must also submit IRS Form 8862, in order for the IRS to reassess your situation.

What is a qualifying child according to the Earned Income Credit? The child must be below the age of 19, or under the age of 24 and enrolled full time in college. The child may also be considered disabled and be any age. Additionally, the “child” must be either a daughter, son, stepchild. Also, the child may be a sister or brother, half-sister or half-brother, or a stepsister or step brother. Or additionally the child may be a descendant of any of those like a grandchild or a nephew. Finally the IRS will check two more things before allowing the Earned Income Credit, whether the child lived with you and if the child appears on only your return, or if someone else claimed the child on their income tax return.

Tax Deduction of Meals and Entertainment

Often times, in the business world, companies find themselves needing to entertain prospective and current clients. With this fact in mind, the IRS has established many specific rules for tax deduction of these expenses. To ensure that these tax deductions are not abused, they have also set up several requirements governing their use.

The first requirement is that the expense be Directly Related to or Associated to your business. To be considered eligible for a directly-related tax deduction, your company must be able to prove that:
• The entertain event was held to allow of business to be conducted;
• During the event, actual company-related business was accomplished;
• The event would benefit your business in some way, whether financially, through future growth options or other similar You had more than a general expectation of getting income or some other specific business benefit at some future time.
The expense being claimed on a tax return does not have to have directly resulted in profits to be deducted.

Events must be held in a clear business setting.

One of the more effective methods of having an expense deducted is to make sure the setting of the entertainment event is considered a “clear business setting.” This small detail allows the IRS to associate the expenses for the event with your company or business. Some examples of a “clear business setting” include:
• A convention or seminar held in a hospitality room that includes the discussion of services or products relating to your business that fosters business goodwill.
• Discounting or providing free access to services or products in the name of customer loyalty, such as free meals given to frequent diners at an eating establishment.
• Providing entertainment to promote or publicize your business in situations where no non-professional relationship exists between the employees and the participants in the event. This could take the form of a show or grand opening event to which important members of a community are invited so that the new business or location can be experienced by those who might have a significant impact on the company’s growth in its early months.

Expenses that are not considered to be directly related.

There are many seemingly harmless entertainment options that are not considered by the IRS to be directly related to a business. These expenses are not deductible based on the idea that the event does not lend itself to business discussions or other financially beneficial outcomes. For example, the following situations are not considered to be directly related to a business’ needs:
• Events held at loud venues, such as sports arenas, dance clubs or theaters.
• Events held during small parties that are not primarily dedicated to business proceedings, such as dinner parties or wine tastings.
• Events that are centered around business related activities or involving people that are entirely unrelated to the business. Examples of this include golf outings, destination vacations, and meetings held at spas, athletic clubs or bars.
The Associated Test.
Many times, your events may not have the criteria to be considered directly related to your business. The associated test, however, gives companies a chance to deduct entertainment expenses that would not otherwise be acceptable. Any entertainment that is considered to be associated must take place right before a significant business discussion or immediately after said discussion and must be associated with the specific area of your business.

How to ensure the entertainment can be associated.

The association of an expense with a business is mostly based on the intent of the entertainment. If it is clear that the expense aided in fostering growth of a new business or improving connections in existing business relationships, the association is likely to be considered valid.

Determination of a business discussion’s significance.

Leaving it up to an outside organization to decide whether your business discussion was significant may seem like a strange idea. However, the IRS has guidelines in place to make this decision fair and balanced. On a case by case basis, those determining the significance of a discussion consider whether there is proof of company-related talks, negotiations or transactions that led to a beneficial outcome for your company. The remainder of the details, such as length of time business is discussed, are not important to the determination once this distinction has been made.

There are many specific rules that define eligible expenses and the steps that must be taken to properly document your expense to gain any available advantages from deducting these entertainment expenses. For more information visit IRS Publication 463 –

Tax Deductions for Non-Cash Charitable Contributions

Tax law allows a donor to claim tax deductions for their contributions of cash to qualified charitable organizations. Taxpayers are also allowed to claim a tax deduction for their contributions of items other than cash. We have all heard the radio ads encouraging us to donate our used car to charity in exchange for a tax deduction. This type of contribution has a number of rules that must be followed in order to receive the expected tax benefit. The single most important rule for non-cash contributions is no different than the rule for a cash contribution. You must obtain a written receipt from the charity acknowledging your donation.

There are also other types of non-cash contributions that you may typically make. Spring cleaning and the purging of old clothes or household goods and donating them to organizations such as Goodwill is a normal routine for most of us. Identify by type and quantity the items that have been donated and keep this list with your current year tax records. Remember to obtain a receipt from the organization and also keep that with your tax records. This receipt will typically not include any details of the items donated so it is up to you to keep these records.

You are required to complete Form 8283 for any non-cash charitable contribution claimed in excess of $500. Donated property with a value claimed in excess of $5,000 requires an independent appraisal that must be attached to your tax return. The IRS and numerous court cases have successfully denied deductions over $5,000 that has not included the independent appraisal.

There are many organizations that claim to be a bona-fide charity. Religious organizations and governmental entities are, by their nature, a Qualified Charitable Organizations. All other entities must apply to IRS for such designation. You can visit this web site to determine an organization’s qualified status.

-Robert Jackovich, CPA

IRS Form 1099-s

The IRS Form 1099-S is used to report transfers of interest in real estate. The form is used to report a wide variety of transfers, including transfers of stock in corporations, or transfers of partial interests in real property, but the situation encountered by most people is the sale of a home that may or may not be the primary residence of the seller.

If you are the seller of the property, then you are not required to file the IRS Form 1099-S, although you may be required to report the transaction when you file your tax return. If the gain from the sale of the home is excusable from your gross income under Section 121 (which you should verify with your accountant or attorney), then you may want to provide a certification to this effect, signed under penalty of perjury. If you do provide the certification, a Form 1099-S will not need to be filed for the transaction, and you will not need to report the transaction on your tax return. If you do not or cannot provide the certification, then a Form 1099-S must be filed. If a Form 1099-S is filed for the transaction, then you should make sure that you receive a copy of this form, because you will be required to report the transaction on your tax return. This is true even if the gain from the sale is ultimately excusable from your income.

If you are the purchaser of the home, then it may be ultimately your responsibility to either collect the seller’s certification mentioned above, or to file a IRS Form 1099-S for the transaction. The IRS has guidelines that list, in a specific order, the people who are responsible for filing a IRS Form 1099-S, and at the end of the list is you – the purchaser. If there is a closing statement for the transaction, then this statement will specify the person responsible for closing the transaction, who is also the person responsible for filing the IRS Form 1099-S. If there is no closing statement, but a bank, a broker, or an attorney is involved in the transaction, the one of these people or entities will most likely be responsible for filing the Form 1099-S, in accordance with IRS guidelines. However, as the purchaser, you should always make sure that you clearly understand whether a Form 1099-S must be filed and, if so, who must do it – because it could be you.

Reporting Income From Tips

The IRS considers all tips received as income subject to federal income tax. This includes all tips received directly, tips paid to an employee that were charged by the employer, and all shares of tips received under a tip-splitting or tip-pooling arrangement with other employees. Because tips are treated as income by the IRS, proper recording and reporting practices must be followed by all taxpayers who receive tips. For tax purposes, a taxpayer must 11) keep a daily tip record, 2) report tips the employer, and 3) report all tips on the Form 1040 tax return. By following these steps, a taxpayer will be able to accurately include all tip income on returns and avoid penalties from the IRS.

Step 1: Keep a Daily Tip Record

The IRS recommends two different methods for keeping daily tip records: keeping a written “tip diary” and maintaining a file of documents from bills, credit/debit card chards, and any other document that may evidence the receipt of a tip. It is best practice to maintain both the tip diary and a tip document file. To assist in keeping a tip diary, the IRS has provided a worksheet called a Form 4070A. The Form 4070A is a chard that provides employment information and spaces to record daily tip information (date of tip, types of tip, tip sharing with other employees, etc.) An important note is that any mandatory service charges, (e.g. 18% gratuity for parties greater than 6,) are considered part of wages and not tips. These service charges will be reported on the annual W-2. Including them as tips would result in double taxation.

Step 2: Reporting Tips to the Employer

Once a tip record is compiled, copies of it should be provided to the employer within ten days of the end of each month. This will allow the employer to withhold Social Security and Medicare taxes and provide credit to for benefit calculation purposes. Only copies of these records should be provided to the employer as the originals should be kept in case of any inquiry by the IRS.

Step 3: Reporting Tips on the Tax Return

If all tips have been reported to the employer per Steps 1 and 2, reporting tips on the tax return is fairly straight forward. The employer will provide the total amount of tips earned on the Form W-2 that is issued at the end of each year and is used to file personal tax returns. The total amount of tips is included in the wages reported in Box 1 of the W-2. If tips are not reported to the employer and total $20 or more, they will need to be reported on a Form 4137, to account for Social Security and Medicare contributions, as well as the Form 1040 regardless of whether the minimum income threshold for filing was met.

If regular records are maintained, reporting tips to the employer and claiming them on the income tax return are not difficult tasks. By taking diligent steps in keeping track of all tips received throughout the year, filing end-of-the-year tax returns will be not only less confusing, but there will also be a greater chance that all Social Security and Medicare benefits will be accounted for and there will be a lesser chance of the IRS applying penalties for misfiling or understating income tax received.

What Are IRS Revenue Officers?

Most taxpayers do not have a specific IRS agent assigned to their file when they owe IRS back taxes and because of this their resolution negotiation is handled by general collections, where any number of different representatives could work on their account over time. Some taxpayers, however, will have their accounts assigned to a dedicated revenue officer.

Revenue officers may be assigned for a number of different reasons. In some cases, a revenue officer must be assigned because the case cannot be handled by general collections; for example, individuals with large balances due or open businesses in need of anything other than a short term, low balance installment agreement will always need a revenue officer assigned to their cases. For these taxpayers, general collections is simply not allowed to resolve their cases.

Many other taxpayers, however, could at one time have resolved their case through general collection channels, but eventually find themselves faced with a revenue officer. Usually, these cases start off with general collections, but the IRS ultimately determines either that general collections has not effectively resolved the account, or that the issues are too complex to be addressed without a revenue officer.

Once a revenue officer is assigned, he or she must make contact with the taxpayer, or with the taxpayer’s representative if a valid power of attorney is on file. Any taxpayer who has a power of attorney, but is contacted by the revenue officer directly, can ask the revenue officer to direct all communication through the power of attorney.

The revenue officer will also typically review the file, issue the appropriate collection notices, and set a deadline for any missing returns, documentation or information he or she considers relevant to the case. While general collections also gives taxpayers deadlines, the consequences of missing those deadlines are, on average, much less extreme and immediate than missing a revenue officer deadline. For example, a missed general collection deadline may allow a collection hold to lapse and leave the taxpayer vulnerable to levy by the next representative who looks at the file. Revenue officers, on the other hand, can respond to missed deadlines with immediate levy, or issue a summons to compel the taxpayer to provide the missing documentation or information.

The level of documentation required by a revenue officer is also often far beyond what general collections requires. While certain expenses or changes in circumstance (such as a decrease in income or a new dependent), will need to be proven no matter who is handling the account, general collections typically does not ask for additional proof of information consistent with the IRS’s internal records, or require substantiation for reasonable expenses for which proof is not required by the Internal Revenue Manual. Revenue officers, however, almost always request full substantiation for income, expenses and assets.

In general, the best course of action when faced with an IRS balance, or with missing returns, is to act quickly and address the problem as soon as possible. For many taxpayers, this will mean working with general collections instead of being assigned to a revenue officer, which will allow for a faster and often simpler resolution to the problem. For taxpayers who either already have a revenue officer assigned, or who will have no choice but to work with a revenue officer due to the size or type of their balance, acting quickly will help them show good faith to the revenue officer, and help the revenue officer close the case as soon as possible.

Foreign Earned Income Credit Exclusion

US citizenship has many benefits, but those benefits come at a price. This sentence will feel especially true for US citizens living and working in other countries. Here’s why: If you are a US citizen your worldwide income is subject to US taxation regardless of where you live. A US citizen living and working in Belize or Kuwait must still file a US tax return and may need to pay taxes to the United States on their foreign sourced income.

But as burdensome as worldwide taxation may sound there are many tax provisions to lighten or eliminate the US tax burden for US citizens earning foreign sourced income. One of these provisions is the foreign earned income exclusion. The foreign earned income exclusion can be used to remove almost $100,000 in foreign sourced income from US taxation and save thousands of dollars of taxes.
To claim the exclusion you must meet these requirements:

    1. You are a US citizen or US Resident Alien
    2. You earned income in a foreign country
    3. Your “tax home” (the general area of your main place of business, employment, or post of duty) was in a foreign country
    4. You were a “bona fide resident” (you established living and business ties with the foreign country that are stronger than your living and business ties with the US) of the foreign country for at least 1 year
    5. You were physically present in the foreign country for at least 330 full days during any 12 consecutive months.

Put simply, to meet the five requirements above you need to earn income in a foreign country, be present in the foreign country for a certain amount of time, and you must have sufficient connections to the foreign country to qualify as a resident rather than just a tourist or temporary visitor.
While the requirements for claiming the foreign earned income exclusion are long the foreign earned income exclusion can save thousands of dollars in taxes. In 2013 eligible taxpayers can remove $97,600 in foreign sourced income from their US tax return. For example, a US citizen lived and worked in Kuwait in 2013 and earned $90,000 and met the 5 requirements to claim the foreign earned income exclusion. That US Citizen would file a 2013 US tax return and would exclude all of his earnings and pay $0 US tax on that $90,000 income. The foreign earned income exclusion would save this taxpayer $14,357.50 in US income tax alone.

In my experience I have seen many taxpayers who live and work in foreign countries for several years and don’t file US income tax returns while abroad. When they return home and file their past due tax returns they don’t properly communicate to their preparer that their income was earned in a foreign country and the preparer doesn’t utilize the foreign income exclusion. These returns are filed and these taxpayers are presented with balance due notices from the IRS on taxes they never should have owed in the first place. It’s usually much later on, when the IRS has started collections proceedings, that the Taxpayer seeks the assistance of a tax professional and the right questions are asked and the returns are amended that the tax balances are finally removed. If you earned income in a foreign country it is important to be educated on applicable tax relief provisions so you can communicate important facts to your return preparer.

Along with the foreign income exclusion, there are many other special tax provisions open to taxpayers with foreign sourced income. It is vitally important that you have an experienced and knowledgeable tax professional on your side making sure you are using these provisions and not paying more than you owe.

Earned Income Credit Saves Families Money

Earned Income Credit Saves Low To Moderate Income Families Extra Money

As tax season comes into full bloom and spring begins to creep up on many parts of the country, it is time to start working on income tax returns. Having a professional do your income tax return is not a luxury some families can afford. That is why it is important to understand tax credits that you may qualify for now before starting to do your return, including the very helpful Earned Income Credit.

Many taxpayers are curious about the Earned Income credit. The tax credit that allows working families to get a larger refund from the government has helped thousands of taxpayers. Here are some ways to know if you’re going to qualify for the Earned Income credit:

1. You or your spouse worked for someone else during the tax year. In order to get the Earned Income credit, you must have earned income from a business or managed your own farm.

2. You and your spouse and anyone else being listed on your Schedule EIC have valid Social Security Numbers that are valid for employment.

3. You are not being claimed as a dependent on someone else’s income tax return. This is to avoid having the Earned Income credit may be claimed on a parent or relatives return.

4. You had no foreign earned income during the tax year. If you are not filing IRS Form 2555 you should be good to claim the Earned Income Credit.

5. You have qualifying children. There’s different rates of income for each additional child that will qualify a taxpayer for the Earned Income credit. If you do not have a qualifying child, you must be between 25 and 65 and not be claimed as a dependent on someone else’s return.

The Earned Income credit is often criticized for having too many qualifying factors. However, once these factors are broken down into easy steps, the Earned Income credit is a viable way for low to moderate income families to get a little extra back from the federal government at the end of the year. If you have questions about how you can claim the Earned Income credit or need assistance preparing your income tax return, contact us today. We’re happy to answer your questions.

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