Believe it or not, about 50% of all Americans pay no federal income tax. Zero, nada, zilch, nothing, a huge goose egg! Today’s Super Saving Tips post might just be the biggest money saver ever and could be worth thousands of dollars to you and your family right now. There are two reasons for it: your income level and certain tax laws and benefits, like the Earned Income Credit and the Child Tax Credit.
The tax system in the United States is designed to be progressive, meaning that higher incomes are asked to pay a larger percentage in income taxes. If your income level is relatively low, standard deductions and exemptions can quickly lower your tax burden to zero according to the Tax Policy Center, a non-partisan research center. But then there’s something else. Because of credits, you can actually get a “refund” of real money without having paid any taxes at all!
Legally, you can have your tax withholding changed so that your W-4 form doesn’t take any money from your pay and in effect, pay nothing all year in taxes. Then, like magic, when tax time rolls around, you can actually get a refund of money you never paid in the first place, if you qualify!
What Are These Refunds and How Do I Get One of Them?
Of Americans who pay no federal income tax, half of them do so because they simply don’t earn a lot of money. The other half doesn’t pay taxes because of special provisions in the tax code that benefit certain taxpayers, notably the elderly and working families with children. I’m pretty familiar with that myself since I know that the tax code excludes a portion of my Social Security income and gives larger standard deductions and tax credits to the elderly. Don’t be too jealous. I have trouble touching my toes and I fall asleep in front of TV at the drop of a hat. I’m elderly. 😛
Many working families with and even people without children can qualify for the Earned Income Credit (EIC) as long as they have some “earned income”. Together, the elderly and working families with children account for 74 percent of all nontaxed households that aren’t excluded by income level alone.
Here’s How It Works…Are You Taking Notes?
Let’s take my imaginary friend “Hilda” who is a single mother with 1 qualifying child and a very modest annual adjusted gross income (AGI) of $25,000. She withheld no federal taxes from her pay last year but did receive a “tax refund” of $1,553. “She got what?” you say.
Hilda has had hard times that left her undervalued and underemployed. Certainly she can use the free money and is very grateful but she also feels some guilt about having paid no taxes and getting a “tax refund”. And a lot of her friends kind of feel that same way. Like, how do you get a tax refund when you don’t pay any taxes in the first place?
One way you can justify it is looking at it this way. Some people, ok may be all people, look for every possible way to reduce their taxes legally (and even illegally) when they are at the higher end of the earnings ladder. So then, this “refund” may be a make-up method for those at the bottom. Another way to think about it is that it encourages work among low-income individuals and helps to keep children out of poverty.
Your Friend, the EIC
What is happening to Hilda is happening to hundreds of thousands of other Hilda’s throughout the nation and has for most of two generations now. The EIC was a provision of the Tax Reduction Act of 1975, introduced by Republican President Gerald Ford. Initially it gave only $400 per child for low-income taxpayers. The provision was made permanent under Democratic President Jimmy Carter in 1979 and has been supported and increased by every president since—Republican or Democrat. The EIC and the Child Tax Credit together can add thousands of dollars to a family’s income.
Eligibility depends on two variables: one, your adjusted gross income (AGI) and the other, the number of kids you have ranging from none to three or more. Yes, even people without children at home like me can qualify for the EIC portion of the tax refunds. The rules say you must have at least one adult be over age 25 and under age 65. Suzanne makes that cut so when we file jointly we qualify.
Earned Income and the AGI Income Limits
For tax year 2017 for the Earned Income Credit, your adjusted gross income (AGI) must be less than:
If filing Single, Head of Household or Widowed
With no children – $15,010
With 1 child – $39,617
With 2 children – $45,007
With 3 or more children – $48,340
If filing Married, Filing Jointly
With no children – $20,600
With 1 child – $45,207
With 2 children – $50,597
With 3 or more children – $53,930
The complete rules for qualification are on the IRS website.
Basically as the IRS describes it, they will pay the tax filer when the Earned Income Credit “exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.” Yes, I said this correctly. Pretty amazing, isn’t it?
Child Tax Credits
Eligible families can claim a Child Tax Credit (CTC) of up to $1,000 per qualifying child. The CTC, like most tax credits, has a phase-out at a certain income levels.
In order for an individual to be eligible for the Child Tax Credit, there are six tests must be met including the Age Test, Relationship Test, Support Test, Dependent Test, Citizenship Test, and the Residence Test. And of course there are income limits too.
For details, check out the IRS information on the CTC.
Married taxpayers with modified adjusted gross income (MAGI) of $110,000 will have a reduced credit and eventually, the credit is fully phased-out above a certain income level. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the CTC is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.
But, there is an Additional Child Tax Credit so that if you have one or two children, it will allow you to receive that amount or 15% of your income over $3,000, whichever is less. If you have three or more children, you can receive that amount, 15% of your income over $3,000, or the total of the Social Security and Medicare taxes you paid in over the year minus the amount of the EIC.
Under the new Republican tax bill for tax year 2018, the CTC will be increased from $1,000 to $2,000 per child per year with up to $1,400 per child refundable. If you’re like many people, you’re probably wondering what does “up to $1,400 refundable” mean, right?
Under the new tax plan, families can receive up to $1,400 per child as a tax “refund”, even if they don’t owe any income taxes at all. For example, a young family with 3 kids making less than $25,000 per year would not owe any income tax. Under the new tax plan, this family would still receive a tax credit refund of $1,400 per child ($4,200 in our example) in addition to the EIC!
Questions 67 and 68 (with apologies to the band Chicago)
So, a typical 2-child family this taxable year who qualifies with an AGI of $50,597 can get up to a $6,338 Earned Income Credit plus a $1,000 per child additional tax credit refund to them. This effectively gives them an income of $58,935. This is better than a real income of that amount because the family’s income is still $50,597 when qualifying for public assistance and when figuring the taxable wages for Social Security and Medicare. This maximum benefit rises every year.
This raises some questions. If a tax credit “payment” is more than the tax owed, the taxpayer receives a net payment from the government—a refund of money he never paid in. How can the Earned Income Credit be called a tax refund when it is other people’s money that is refunded? Why do low to moderate income working individuals and families need a tax credit, when they generally pay no federal income taxes in the first place? The government, whether led by Democrats or Republicans, does not want to answer these questions. Even the new Trump tax law doesn’t change the EIC.
File for Free
And there’s one more thing I wanted to mention while you’re preparing to file your tax returns, and that is you can file them for free! That’s right, you can file for free using Credit Karma (there are a few exclusions), or if you meet certain income qualifications, you can file for free using MyFreeTaxes (from the United Way). And that includes state as well as federal returns!
As I promised you at the beginning of this post, it is possible to get some “free money” (if you qualify just like Hilda, us and thousands of others) and frankly it’s not that difficult for an awful lot of older and low income folks. The only thing you have to do is look at the rules and see if you can qualify. The IRS website is the first place to look.
Do you think this can work for you and your family? Are you living in retirement and can still qualify for the EIC like we do? Have you considered what the CTC or the EIC would mean for you and your family?
Do you think it’s fair to the taxpayer who is forced to pay for another family when often he needs his own limited resources for his own kids—especially for those just above the qualifying lines for special government “goodies” known as the working poor? Hilda, though grateful for the help, asks herself the same questions.