Ch 6 EIC
Can a paid preparer only meet three of the four due diligence requirements to allow the taxpayer to claim the Child Tax Credit?
A paid tax return preparer must meet all four of the due diligence requirements before filing a taxpayer's return claiming the Additional Child Tax Credit.
form 8867 computation worksheets knowledge documentation
Due diligence for ACTC
A penalty that can be assessed against tax preparers who fail to comply with the due diligence requirements of the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), American Opportunity Credit (AOTC), and the head of household (HH) filing status.
Due diligence penalty
Requirements established by the IRS that paid tax return preparers must follow when preparing returns. As part of exercising due diligence, tax preparers must interview the taxpayer, ask adequate questions, and obtain appropriate and sufficient information to determine correct reporting of income, claiming of tax benefits, and compliance with the tax law.
Due diligence requirements
To qualify for the credit, taxpayers without qualifying children must: Be at least 25 years old, but younger than age 65, at the end of 2018 (if MFJ, either spouse can meet this requirement). Not be able to be claimed as a dependent on another taxpayer's return. Not be a qualifying child of another person. Live in the United States more than half the year. Have AGI of less than $15,270 ($20,950 if married filing jointly).
EIC for Taxpayers Without Qualifying Children
Have a qualifying child who meets the relationship, age, residency, and joint return tests. Have a qualifying child who is not claimed by another person for EITC. Not be a qualifying child of another person. Have AGI less than one of the following: $40,320 ($46,010 if MFJ) with one qualifying child. $45,802 ($51,492 if MFJ) with two qualifying children. $49,194 ($54,884 if MFJ) with three or more qualifying children.
EIC requirements for Taxpayers with children
In order to qualify for the Earned Income Tax Credit, the taxpayer must work and have "earned income." Earned income is wages, commissions, tips, farming, and other business income, such as the net earnings from self-employment income. Military personnel may elect to include their nontaxable combat pay, reported in box 12 as code Q on their Form W-2, shown below, as earned income.
Earned Income
A refundable tax credit for qualified taxpayers based on earned income, adjusted gross income, and the number of qualifying children. The credit can be worth as much as $6,431 for 2018, depending upon the taxpayer's filing status, income, and number of qualifying children claimed. The EITC is a refundable credit, which allows the taxpayer to receive the credit as part of their refund, even if their tax liability has been reduced to zero.
Earned Income Credit (EIC or EITC)
An individual who is enrolled in a school for the number of hours or courses considered by the school to be full time. School includes elementary and secondary schools, post-secondary colleges, and technical and trade schools. It does not include on-the-job training, correspondence schools, or night school. However, a student will not be disqualified by night classes that are part of a full-time course of study.
Full-time student
Qualifying person Exceptions: 1. QP is Married and can't be claimed 2. QR that is not related to TP 3. QR meets relationship but has not lived w/TP more than 1/2 the year - except the parent
HH can't be used if the qualified person
Noncustodial parent may not claim
Head of Household Daycare/Dependent Care Earned Income Credit*
In order to prevent persons with substantial assets from receiving the EITC, the credit is denied to any taxpayer with investment income exceeding $3,500 for 2018. For this purpose, investment income includes the following: Taxable and exempt interest. Taxable dividends. Net capital gain income (excluding §1231 gains), if greater than zero. Net nonbusiness rental and royalties, if greater than zero. Net passive income that is greater than zero and is not self-employment income.
Investment Income Limitation
This term generally includes income from interest, dividends, capital gains, and other types of distributions. The subject can be fully explored in IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).
Investment income
File a separate return from spouse Have not lived with spouse during the last 6 months of the year Provide > 1/2 cost of maintaining their home that was the main home of their dependent child
Married but unmarried for Tax Purposes
Is the Additional Child Tax Credit is a nonrefundable credit.
No, The Additional Child Tax Credit is a refundable credit that is available when a taxpayer's tax liability limits the amount of Child Tax Credit they are eligible to deduct.
Is the Child Tax Credit and/or Additional Child Tax Credit is worth up to $1,000 per child for 2018.
No, the CTC and/or ACTC is worth up to $2000/child for 2018
The Child Tax Credit is a refundable credit.
No, the Child Tax Credit is a nonrefundable credit that can reduce the taxpayer's tax liability down to $0.
Juan (52) is filing as a single taxpayer with no dependents. Juan's earned income and AGI in 2018 was $15,281, all from wages. He had no other income. Juan is a U.S. citizen.
No. Juan's income was greater than $15,269.
Lorelei (29) and Sean (28) are married taxpayers, filing a joint return. Lorelei's income from wages was $18,871. Sean's income from wages was $10,465. They had $88 of interest income from their checking account. They had no other income in 2018. Lorelei and Sean are expecting their first child in June of 2019. Both are U.S. citizens.
No. Lorelei and Sean have a combined income greater than $20,949.
Rosalee (19) is filing as a single taxpayer with no dependents. Rosalee's earned income and AGI in 2018 was $8,974, all from wages. She had no other income. She is a U.S. citizen.
No. Rosalee is not between the ages of 25 and 65.
The parent who is not the custodial parent of the child.
Noncustodial parent
A credit which cannot exceed the taxpayer's tax liability.
Nonrefundable credit
Why can't a taxpayer claim the ODC but not the Additional Child Tax Credit?
ODC requirements and additional child tax credits are not the same; ODC is for a child >age of 16-23 (full time student), ACTC and CTC requires child <17.
unless the other taxpayer is their spouse and they file a joint return, or the rules for divorced or separated parents apply, as discussed in Chapter 4. Once the decision is made, that taxpayer claims all the tax benefits for the child (provided they are eligible for each benefit).
Only one taxpayer can claim the child as their qualifying child
Is the OTC credit refundable?
Other Dependent Credit (ODC): worth up to $500 per qualifying dependent, is not a refundable credit.
A disability that prevents an individual from engaging in any substantial gainful activity because of a medically determined physical or mental impairment that is expected to result in death, or that has lasted or is expected to last for a continuous period of not less than 12 months.
Permanent and total disability
The place that an individual considers to be their permanent home. A person's abode does not change when they are temporarily absent due to illness, school, military service, etc., as long as their living area is maintained and they can reasonably be expected to return home after the temporary absence.
Principal place of abode (principal residence)
Child Tax Credit (Partially Refundable)
QC, <17, claimed, US citizen, National or Resident
A child who meets the relationship, age, residency, support, joint return, and special tests with regard to a taxpayer to determine the taxpayer's eligibility to claim the Child Tax Credit, Earned Income Credit, or Child and Dependent Care Credit with regard to the child, or to use the head of household filing status.
Qualifying child (QC)
To qualify for the EIC, taxpayers with one or more qualifying children must: Have a qualifying child who meets the relationship, age, residency, and joint return tests. Have a qualifying child who is not claimed by another person for EITC. Not be a qualifying child of another person. Have AGI less than one of the following: $40,320 ($46,010 if married filing jointly) with one qualifying child. $45,802 ($51,492 if married filing jointly) with two qualifying children. $49,194 ($54,884 if married filing jointly) with three or more qualifying children.
Taxpayers With EIC Qualifying Children
What 4 due diligence tasks must a paid preparer perform in filing a taxpayer's return for form 8867?
1. Fill out the form thoroughly and conscientiously to the best of their ability. 2. Keep all worksheets; complete these with accuracy 3. knowledge: ensure correct questions are asked to get all relevant facts 4. Retain records, documents and notes
Other Dependent Credit (dependent line, first page 1040):
1. claimed as a dependent (QC? or QR) 2. Cannot qualify for CTC - >16, <24 3. US citizen, national, or resident 4. must have SSN, ITIN, or ATIN
Due diligence
1. complete and submit Form 8867 2. complete and keep all worksheets 3. Satisfy knowledge requirement - ask the ?s 4. Satisfy the documentation requirements
Relationship, Age, Residency, and Joint Return
4 requirements to qualify for EIC
A refundable credit available to certain taxpayers who get less than the full amount of the Child Tax Credit. The credit is available to taxpayers with earned income exceeding $3,000 or those with three or more qualifying children and whose regular Child Tax Credit exceeds tax liabilities minus other refundable credits. The Additional Child Tax Credit is computed on Form 8812. See also Child Tax Credit.
Additional Child Tax Credit (ACTC)
The taxpayer's qualifying child must be one of the following: Under the age of 19 at the end of 2018 and younger than the taxpayer (or the taxpayer's spouse, if filing jointly). A full-time student under the age of 24 at the end of 2018 and younger than the taxpayer (or spouse, if filing jointly). Permanently and totally disabled at any time during 2018, regardless of age.
Age requirements for EIC
The taxpayer must have a qualifying child. The qualifying child must be under the age of 17 at the end of the year. The qualifying child must be a dependent on the taxpayer's return. The qualifying child must be a U.S. citizen, U.S. national, or resident of the United States. The qualifying child must have a social security number.
Child tax credit tests: 5
1. HH 2. Daycare/dependent care 3. EIC
Can only be claimed by custodial parent
A nonrefundable credit of up to $2,000 per dependent child under age 17 at the end of the tax year with an SSN.
Child Tax Credit (CTC)
Deductions, such as the standard deduction, lower the tax by reducing the amount of income that would otherwise be taxable. Lower taxable income results in a lower tax liability.
Deductions
Noncustodial Parent May Claim
Dependent ExempTion Child Tax Credit OTher Dependent Credit Additional Child Tax Credit
A child, other than the taxpayer's biological child, stepchild, or adopted child, who was placed with the taxpayer by an authorized placement agency or by a court order, decree, or judgment.
Eligible foster child
A person who (1) bears a certain relationship to the taxpayer; (2) for whom the taxpayer provides more than one-half support for the year; (3) whose gross income for the year is less than $4,150 for 2018; and (4) who is not claimed as a qualifying child of any taxpayer.
Qualifying relative (QR) 4 tests
A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability.
Refundable credit
A son, daughter, stepchild, eligible foster child, adopted child, or descendant of any of them. A brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.
Relationship requirements for EIC
The taxpayer's qualifying child must have lived with the taxpayer in the United States (as defined earlier) for more than half of 2018. The rule for military personnel mentioned previously also applies to residency.
Residency requirements for EIC
To qualify for the credit, all taxpayers must: Have a valid social security number (SSN). Not use the filing status MFS. Be a U.S. citizen or resident alien all year. Not file a Form 2555, Foreign Earned Income. Have investment income of $3,500 or less. Have earned income. Have AGI under the relevant limit: $40,320 ($46,010 if married filing jointly) with one qualifying child. $45,802 ($51,492 if married filing jointly) with two qualifying children. $49,194 ($54,884 if married filing jointly) with three or more qualifying children.
Rules for Taxpayers With or Without a Qualifying Child
The total amount provided on behalf of an individual. Support includes food, lodging, and other necessities, as well as recreation and other nonessential expenditures. Support is not limited to necessities and can be as lavish as the taxpayer can afford.
Support
A child who would be a qualifying child for dependency under the uniform definition, except that they provided more than 50% of their own support, may be a qualifying child for purposes of the EITC
Support requirements for EIC
What are the requirements and advantages for the ACTC to taxpayers?
The Additional Child Tax Credit is refundable and may be available to taxpayers with more than $2,500 earned income for 2018, or three or more qualifying children for the Child Tax Credit.
1. Parent 2. Parent lived with longest 3. Parent with highest AGI 4. Highest AGI of nonparent 5. Parent/nonparent choice only if AGI greater than parent
Tiebreaker rules
1. Dependent ExempTion 2. Child Tax Credit 3. OTher Dependent Credit 4. Additional Child Tax Credit
Traveling credits; can be claimed by noncustodial parent
T or F: Credits are valuable to taxpayers because they reduce tax liability dollar for dollar. Nonrefundable credits may not reduce a taxpayer's tax liability below zero. Refundable credits may reduce a taxpayer's liability below zero, and they will receive a refund for the difference.
True
T or F? The refundable Earned Income Tax Credit may be worth up to $6,431 to working taxpayers with earned income and AGI of less than $54,884 for 2018.
True. EIC may be worth up to $6431 to working taxpayers with earned income and AGI of less than $54,884 for 2018.
Line 1. Asks if the taxpayer wants the IRS to figure the credit for them. Answering no directs you to complete Worksheet A. Part 1. This section determines the EITC based on earned income as calculated in step 5. Then, AGI is taken into consideration to see if it differs from earned income. Taxpayers whose earned income differs from their AGI must go on to Part 2. Part 2. This section determines EITC based on the taxpayer's AGI (see the worksheet for exceptions). Part 3. The taxpayer's EITC is the lesser of the amounts calculated in Parts 1 and 2, above.
Worksheet steps for filing 8867, EIC Step 6 Figure the Credit
Is the Additional Child Tax Credit is a refundable credit.
Yes
Yes or No: Is the maximum amount of EITC a taxpayer may receive is $6,431 if they have three or more qualifying children and their earned income is between $49,194-$54,884 for 2018.
Yes
Yes or No: The taxpayer must not have investment income of more than $3,500 to qualify for EITC.
Yes
Is a paid tax return preparer required to complete Form 8867 with due diligence for ACTC?
Yes, a paid tax return preparer is required to complete Form 8867 when preparing a taxpayer's return claiming the ACTC.
Can a Taxpayer A taxpayer may qualify for EITC with or without a qualifying child?
Yes, if they meet the requirements: 25-65 yo, AND...
Ernest (45) and Teresa (41) are married taxpayers, filing a joint return. Ernest's income from wages was $23,457. Teresa's income from wages was $18,293. They had $144 of interest income from a money market account. Their AGI was $41,894. They had no other income in 2018. Ernest and Teresa have two dependent sons, Michael (17) and Connor (15). They all lived together in 2018, and no one else lived with them. Ernest, Teresa, Michael, and Connor are all U.S. citizens.
Yes. Their combined earned income of $41,750 and AGI of $41,894 would allow them to receive $2,025 in EITC.
-A dependent who is a qualifying child and has not reached their 13th birthday when the care was provided. -The taxpayer's spouse, who is physically or mentally incapable of self-care and lived with the taxpayer for more than half of 2018. -A disabled person of any age who is physically or mentally incapable of self-care, who lived with the taxpayer for more than half of 2018, and who the taxpayer claims as a dependent or could claim as a dependent except that: -The disabled person had gross income of $4,150 or more. -The disabled person filed a joint return.The taxpayer (or their spouse if filing jointly) could be claimed on another taxpayer's 2018 return.
qualifying persons for Child and Dependent Care Credit
If more than one taxpayer claims the credit with respect to the same child, who will decide which will receive the credit, based on the tiebreaker rules?
the IRS
(or their spouse, if filing a joint return) who is a qualifying child of another taxpayer cannot claim the EIC credit. This is true even if the other person chooses not to actually claim the taxpayer
Any taxpayer
Credits do not come into play until after taxable income has been computed and the tax determined. Then, credits may be used to reduce the tax liability already determined dollar for dollar.
Credits
The parent with whom a child lived for the greater number of nights during the year.
Custodial parent
An individual who may be claimed on another person's income tax return. To be claimed as a dependent, a person must meet the qualifying child or qualifying relative test.
Dependent
The taxpayer's qualifying child cannot file a joint return, unless it is just to claim a refund. If a taxpayer's qualifying child is married, the taxpayer must be able to claim the child as a dependent (unless the divorced parents rules apply).
Joint Return requirements for EIC
The requirement that a tax return preparer must not know, or have reason to know, that any information used in determining a taxpayer's eligibility for, or the amount of, Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Earned Income Tax Credit (EITC), or American Opportunity Tax Credit (AOTC) is incorrect.
Knowledge requirement
T or F? The Earned Income Tax Credit is a refundable credit. Taxpayers with no qualifying children, who are at least 25 years of age, and younger than age 65, may qualify for the Earned Income Tax Credit
True: EIC is refundable, children not necessary to file; 25 - 65 years old, earned income >$2500.
Line 1. Determines eligibility based on income and number of qualifying children. Line 2. Determines eligibility based on the taxpayer (and spouse, if filing a joint return) having a valid SSN that allows them to work. Line 3. Determines eligibility based on filing status. Taxpayers whose filing status is married filing separately are not eligible for EITC. Line 4. Determines eligibility based on foreign earned income. Taxpayers filing Form 2555 are not eligible for EITC. Line 5. Qualifies taxpayers according to residency status. Nonresident aliens must be married to a U.S. citizen or resident alien, file a joint return, and choose to be treated as a resident alien.
Worksheet steps for filing 8867, EIC Step 1
Line 1. Computes the taxpayer's total investment income. Line 2. Determines whether the taxpayer's investment income exceeds the maximum of $3,500 for 2018. Line 3. Relates to the sale of business property. Line 4. Determines if the taxpayer must use Worksheet 1 in Publication 596.
Worksheet steps for filing 8867, EIC Step 2 Investment Income
Line 1. Determines whether the taxpayer qualifies as a taxpayer with or without a qualifying child. Line 2. Determines if the taxpayer is filing a joint return or not. Line 3. For taxpayers who answered "No" to line 2, this line qualifies taxpayers according to their ability to be claimed as a qualifying child on another tax return. Taxpayers who are the qualifying child of another taxpayer who is required to file a tax return cannot claim EITC.
Worksheet steps for filing 8867, EIC Step 3 Qualifying Child
Line 1. Determines eligibility according to income and filing status for taxpayers who do not have a qualifying child. AGI must be less than $15,270 ($20,950 if married filing jointly). Line 2. Determines eligibility according to age. Taxpayers without a qualifying child must be at least age 25 but under age 65 at the end of 2018. Line 3. Determines eligibility according to residency in the United States. Taxpayers whose main home was not in the U.S. for more than half of 2018 do not qualify for EITC. Members of the military may qualify under certain circumstances. Line 4. Determines if the taxpayer without qualifying children is filing a joint return or not. Line 5. For taxpayers who answered "NO" to line 4 above, this line qualifies taxpayers according to their eligibility to be claimed as a qualifying child on another tax return. Taxpayers who are the qualifying child of another taxpayer who is required to file a tax return cannot claim EITC. Line 6. Determines eligibility according to the taxpayer's dependency status. Taxpayers who can be claimed as a dependent on another taxpayer's tax return cannot claim EITC.
Worksheet steps for filing 8867, EIC Step 4 Filers w/o a QC
Line 1. This line first determines if the taxpayer is clergy or a church employee. The worksheet that follows calculates income from taxable scholarships or fellowships, income from work performed while in prison, and income from pensions or annuities from nonqualified deferred compensation plans. The sum total of the above is then subtracted from earned income that was reported on Form 1040, line 1. Finally, nontaxable combat pay is taken into consideration, as in some cases it may increase EITC, and the taxpayer may elect to treat it as taxable. Line 2. Accounts for any income from self-employment activities including those by clergy or church employees. Line 3. This line takes into consideration the amount from step 5, line 1, above to make final determination of EITC eligibility.
Worksheet steps for filing 8867, EIC Step 5 EI
Can a paid preparer be penalized $520 for each failure, per credit, per return if due diligence is not exercised?
Yes, the IRS is showing how serious the due diligence of the paid tax return preparer is by imposing this penalty.
Anita (42) is a married taxpayer. Her husband, Mark (43), has not lived with her since 2015 and Anita is considered unmarried for tax purposes, filing head of household. Anita's earned income and AGI was $28,478, all from wages. She had no other income. Anita has one dependent daughter, Samantha (14). Anita and Samantha lived together in 2018, and no one else lived with them. Both are U.S. citizens.
Yes. Anita would receive $1,893 in EITC.
Marty (24) is a single taxpayer, filing head of household, with one dependent, Mindy (2). Mindy is Marty's daughter, and she lived with him for all of 2018. No one else lived with Marty. Marty's earned income and AGI was $23,457, all from wages. He had no other income. Both Marty and Mindy are U.S. citizens. Marty is not a full-time student.
Yes. He would receive $2,692 in EITC.
Ronald (28) is filing as a single taxpayer with no dependents. Ronald's earned income and AGI in 2018 was $10,281, all from wages. He had no other income. He is a U.S. citizen.
Yes. Ronald would receive $382 in EITC.
Junichi (34) and Mariko (32) are married taxpayers, filing a joint return. Junichi's gross income from wages was $34,281. Mariko had no income in 2018. They had no other income in 2018. Junichi and Mariko have one dependent daughter, Sakiko (4). They all lived together in 2018, and no one else lived with them. Junichi, Mariko, and Sakiko are all U.S. citizens.
Yes. They would receive $1,875 in EITC.
Which of the following statements is incorrect regarding EITC? a. A taxpayer may qualify for EITC with or without a qualifying child. b. A taxpayer must be a U.S. citizen or resident alien for more than half of the year. c. The maximum amount of EITC for 2018 is $6,431. d. The taxpayer must not have investment income greater than $3,500.
b. A taxpayer must be a U.S. citizen or resident alien for more than half of the year.