Earned Income Tax Credit

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School
Temple University **We aren't endorsed by this school
Course
ACCOUNTING 3531
Subject
Accounting
Date
Oct 31, 2023
Pages
1
Uploaded by naikamit on coursehero.com
Earned Income Tax Credit The Earned Income Tax Credit (EITC) is a refundable credit that is aimed at low-income taxpayers with earned income. As an alternative to being refundable on the tax return, this credit can also be advanced to the taxpayer in their wages throughout the year. To qualify for the EITC, the taxpayer must live in the United States for more than half of the year, be at least 25 years of age (19 for 2021 only) and under 65 years of age, not be a dependent of someone else, have a portfolio or passive income of no more than $11,000, and file MFJ if married. The maximum income for claiming EITC varies according to filing status and number of children who qualify. The way to arrive at the amount of the EITC is to use the tables supplied by the IRS. The current year's table is in the appendix in your textbook. To use it, simply find the taxpayer's filing status at the top, along with the number of qualifying children. Go down that column until you reach the taxpayer's earned income. The amount of the credit is indicated in the table. American Opportunity Credit To qualify for the American Opportunity Credit, the student must have no felony drug convictions and be enrolled in a degree-seeking program at least half-time for at least one academic period (semester, quarter) during the year. The expenses that are eligible for the credit are tuition, fees, and educational materials, such as books and, possibly, computers. And the taxpayer must reduce the eligible expenses by any amounts distributed from college savings accounts, such as Coverdell or 529 accounts, and by any scholarships or grants received. Otherwise, the taxpayer will be double counting, which is something for which the IRS looks. The American Opportunity Credit is restricted to the first 4 years of undergraduate study only. The amount of the credit is 100% of the first $2,000 of eligible expenses and 25% of the next $2,000 of eligible expenses, which means the maximum amount of this credit is $2,500. When the credit is calculated, 40% is refundable, up to a maximum of $1,000. To target the credit to those Congress felt needed it most, they included an income-based phaseout of the credit. It applies when AGI exceeds $160,000 for MFJ, $80,000 for all other filing statuses. The phaseout is calculated as: Credit amount × (1 − (AGI−phaseout starting amount) / phaseout limit) Phaseout starting amount = $160,000 if MFJ, $80,000 for all other filing statuses, and Phaseout limit = $20,000 if MFJ, $10,000 for all other filing statuses. So, when AGI reaches $180,000 for MFJ or $90,000 for others, the taxpayer is no longer eligible for the credit.
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