Talk:Earned income tax credit

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There's no dependent requirement for 2008, this article is dated. —Preceding unsigned comment added by 24.176.12.41 (talk) 01:28, 15 April 2008 (UTC)

++++

Beginning with tax year 2005, there are two ways to claim a dependent:
qualifying relative (or member of household) --> dependent
qualifying child --> dependent. And for this method, there's only a watered-down requirement of support, in that the child cannot be providing more than 50% of their own support.

Now, for purposes of the Earned Income Credit, there is no support test at all. The test for claiming a qualifying child is the combination of age, relationship, and shared residency. (And yes, there are details, as there seemingly almost always are with tax law, one of edge cases here being if an older "child" is married. You can still claim him or her, it's just harder.) FriendlyRiverOtter (talk) 20:36, 20 May 2008, (and cleaned up May 21st!) (UTC)



Half this article is based on speculation.

++++

None of this article is based on speculation.

Here's some websites: http://www.tax-coalition.org http://www.cbpp.org/7-19-05eic.htm http://thomas.loc.gov/cgi-bin/query/z?r103:H30JY3-70:

LegCircus 04:32, 3 November 2005 (UTC)

++++

Well, let's say some of the article. We can always use more references. FriendlyRiverOtter (talk) 02:47, 16 March 2008 (UTC)



Credit for the EITC should be given to Friedman. He was the one who proposed negative income tax for those on welfare.


Contents

[edit] Not a Worldwide POV

This article primarily deals with the EITC in the US. The article should be renamed "Earned income tax credit in the U.S." and the other countries should be taken out. If they want to have an entry about the EITC in general, then make that a separate article and talk about the other countries there. 12.227.254.234 (talk) 20:55, 20 January 2008 (UTC)

[edit] U.S. Military

The little blurb about the Military sounds like it is coming from someone who wants to express their personal opinion against the military receiving the EITC, or perhaps even bitter that they receive it. The comment about WIC is also pulled from out of nowhere. Then they bring in the subject of deployments and taxes. These statements can easily be interpreted as a statements to back up a specific viewpoint. Even though this person never mentions their opinions, the facts are presented in a way to persuade a reader of their opinion. 12.227.254.234 (talk) 20:55, 20 January 2008 (UTC)

[edit] "If you leave your violent spouse in October . . . "

Well, if you leave the violent spouse in October, per IRS regulations, you will not be able to classify for Head of Household, and consequently you will not get Earned Income Credit.

This is an example of regulations not being realistic to actual real-world situations. If you leave the violent spouse in February--and good for you!--you ought to be able to file as Head of Household or Single simply because you choose to so file.

If we're so afraid of people gaming the system, for example, switching back and forth between married joint and married separate depending on the circumstances of the tax year, then we could adopt something similar to the Look-Back Rule for 1231 property. Now, 1231 business property is generally land, building, or equipment held for a year or more. It's not technically capital gains property but it receives capital gain treatment, even more favorably, for you receive ordinary losses and capital gains (truly the original alchemy of taxes!). And so, there's the Look-Back Rule. When you have a 1231 gain for the current year, you must first "look back" and see how much 1231 loss you declared for the previous five years. Up to that extent, the current year's gain is ordinary gain. Anything past that is taxed as capital gain.

So, we could do the same thing with filing status, perhaps going back three years, which is as long as individuals are required to keep records. I think it would be sufficient to just go back just one year. If you wish to go back to filing married joint after filing married separate, you must file an amended return for the last year's married separate.

As far as the harm of family violence, we can look at the burden President Clinton carried, and a situation he handled about as well as any fifteen year-old boy could. The story his mother told in his film biography during the '92 Democratic Convention. His step-dad drank and sometimes became violent. Bill went into the room, got right in his Dad's face and said, 'Daddy, stand up, there's something I got to tell you. Now, if you can't stand up, I'll help you stand up, but you got to be standing for what I have to say.' When he stood up, Bill told him that he would not hit Mom again.

I love the way he was both strong and respectful. But it probably wasn't enough. The baseline for habits of violence is of such long history. And the Dad probably took it personally. Instead of thinking about it the next day and welcoming that his son was becoming a man, he probably took it personally and took it as a threat. And even though he may not have been as big as Bill, he was probably wily. The violence probably continued. And his mother probably stayed with him.

Bill was basically a rage-aholic during his political life. Staff members that put up with it viewed it as a Summer thunderstorm, something that suddenly came and suddenly went. But that's no way to treat people. You see, he wasn't able to protect his mother, despite his very best efforts.

What the...?Isaac Crumm 00:18, 23 January 2007 (UTC)
Well, I may not have pulled it off! What I was trying to do was to include both the accurate technical details and the nitty gritty of real life, for that's when you get really good public policy. So, Isacc, perhaps where I've fumbled it, you can pick up the ball and advance it forward.
Married filing separately is a punitive filing status, and I argue unnecessarily so. And this unfairness will be borne most heavily, maybe not in actual tax dollars, but in living standards, by those with the least income and/or by those in the most vulnerable situations. Furthermore, family violence is not a one out of a million phenomenon. Oh no, it's not a rare bird. Not at all. The lives of many, many people would be better off if it were, but it just isn't. It is a relative common phenomenon. And it's hard enough for someone to leave this type of situation as it is. We do not need the tax code adding yet one more obstacle. FriendlyRiverOtter

Although I see your point, I don't know of any data that shows that women (they are primary category) don't leave an abusive spouse BECAUSE of the tax ramifications. If you do want to look at financial reasons, income and insurance benefits would most likely have a higher priority on their decision. However, the tax code is what it is, and the hell if a piddly article on wikipedia is going to change anything. If you are passionate about it, you ought to write some liberal congressman, not rant about it here.Isaac Crumm 09:01, 3 May 2007 (UTC)

Well, this is something I would hope both liberals and conservatives would be concerned about. True, whether a person leaves abusive circumstances probably has more to do with money right now than with money six months down the line. But, if we look at our own personal lives, it’s often the little things, the glitchy things, the awkward things, that delay us in making changes we really feel would be changes for the good. This is probably why women’s shelters have been effective. They make the whole thing do-able. They create something so that a person can take a step.
And it’s appropriate to discuss it here because it’s an example of tax law being clunky, both in the all-or-nothing aspect and in the over-restrictive requirements (because we’re overly afraid of people gaming the system). And the dollars are considerable. For a mom with two kids earning $10,000 for the year, earned income credit is $4,010. That's a lot of money. The difference between whether she qualifies or whether she doesn’t, is three people living on $14,010 for the year vs. three people living on $10,000.
The all-or-nothing aspect, it's not there for business expenses on Schedule C, nor for casualty losses on a Sch A.
And, as you alluded, sadly, but not unexpectedly, violence is primarily a problem on the part of us men. And although anger is a human emotion, somehow it becomes defined as the one most acceptable emotion for men (and what a truncated way to live a life!). And whereas we might preach violence only as a last resort, very often it sure looks like a first resort. A good counter-balance might be a martial arts teacher who preaches walking away from a fight if you possibly can. Or, a football coach who is calmly and matter-of-factly against cheap shots and dirty play, and occasionally benches his own players. FriendlyRiverOtter 07:00, 13 June 2007 (UTC) 02:09, 29 March 2008 (UTC) (And other dates, it takes me a while to hone what I'm trying to say. And Bill Clinton's stepdad is still the most public case I know of domestic violence.)

[edit] . . . Or, lived apart from spouse entire last six months of year

If you did that, if you have a qualifying child you're eligible to claim as a dependent, and if you paid more than half the costs of keeping up a home which was the main home for you and the child for more than half the tax year (or several main homes that add up to more than half the year), then you can file as Head of Household and still claim EITC.

[edit] . . . Or, obtained divorce by Dec. 31st

It's the marital status on the last day of the year that counts for tax purposes.

[edit] . . . Or, "legally separated, according to your state law" by Dec. 31st

This might sound somewhat old-fashioned, but could be, probably is still available in family courts. If so, that's enough and you can file as either Single or Head of Household. FriendlyRiverOtter (talk) 03:29, 25 March 2008 (UTC)

[edit] Impact

I don't see how the deleted portion was biased or in any way bad (it was an official government website which was cited) and I think that it demonstrates the fact that the EITC has a huge impact on the working poor. I don't see why it shouldn't be included, so I've added it back in. Jackson744 06:37, 23 April 2006 (UTC)

[edit] To abstract: missing examples

The article should add examples with the situation before and after for low-income earners making e.g. $5,000 and $10,000 including all other taxes.

The explaination of how EITC works is unclear. Do you get the refund in cash the year after? Is it deducted from other taxes: payroll taxes ? state taxes?

What is the total tax burden for these people?

The figure is impossible to understand for non-neoclassical economists.

MaxPont 08:27, 27 September 2006 (UTC)


Okay, let's do some numbers for tax year 2006.

$5,000 income, no children --> $384 earned income credit

$5,000 income, one child --> $1,709 earned income credit

$5,000 income, two or more children --> $2,010 earned income credit


$10,000 income, no children, single --> $160 earned income credit

$10,000 income, no children, married joint --> $313 earned income credit

$10,000 income, one child --> $2,747 earned income credit

$10,000 income, two or more children --> $4,010

(For claiming the credit with child(ren) at $10,000, it doesn't matter whether you're married or not because you're not yet in phase-out range.)

Most people get the credit in cash when they file their taxes toward the beginning of the next year (after they receive their W-2s late January or early February). A few people get it throughout the year by filing a W-5.

For a person or couple without income, EIC exactly matches the 7.65% paid in social security. For people with children, it's considerably more. As far as other taxes, it would take a substantial economic discussion. Low-income persons typically rent rather than own housing and thus indirectly pay property taxes, plus do not have the tax benefit of deducting mortgage interest. Then there's the interesting thesis that the poor pay more: for groceries at stores located in low-income neighborhoods, for washing clothes at laundromats rather than buying their own machines, etc, etc. And most of all, I hope we can discuss the seeming observation that modern economies do not create enough jobs, much less enough good jobs.

And for the person who said a graph would be helpful, I heartily second the motion! [1] This is a good basic graph, although now a couple of years old.

FriendlyRiverOtter 04:37, 22 February 2007 (UTC)

For childless couples, the EIC indeed amounts to a refund of the FICA tax owed on personal account. But the maximum income for which this is the case is only $5600, about what a college student can expect to make on a decent summer job, and much less than a year's earnings from a full time job paying the minimum wage. Little known fact: one cannot purchase very cheap slummy housing with a mortgage, because such properties cannot pass the inspection lenders require. Hence the shacks on the dark side of town are bought with cash. Hence the the deductibility of mortgage interest and property taxes is irrelevant for EIC recipients. The poor do indeed pay higher retail prices. There are fewer stores, and no Walmarts, where they live. The poor often cannot research where the lowest prices are, because of limited literacy. They often either do not drive or minimize their driving. The American economy creates lots of jobs, but jobs for unsophisticated people usually do not pay well. That's why the EIC was created, as a wage subsidy for the working poor. It rewards having one adult in a household with children working at a low wage job. In mid-2009, the annual minimum wage, assuming 2000hours/year, will be $14500; the EIC phase-out range for households with children began at $15400 in 2007. The downside is a substantially higher marginal tax rate for those in the range where the EIC declines.123.255.60.35 (talk) 20:39, 6 June 2008 (UTC)

[edit] Where are 2006 EITC parameters?

I've just spent several hours trying to dig up the precise parameters for the 2006 tax year EITC (i.e., for each filing status, what is the ramp up rate, the maxiumum credit, and the phrase out rate). I've found historical data, which I've linked to, but nothing from the last couple of years. Any hints? The article gives some of the information, but I'd like to include more or it, as well as a citation of a more official source for the figures. -- Ryguasu 06:02, 26 January 2007 (UTC)

Okay, I found some figures here that the Tax Policy Center has assembled. Good stuff, and I've referenced it in the article. I still wish there were a source on a government website, though. You'd think the IRS, the Congressional Budget Office, the Weighs and Means Committee, or somewhere, would put it on their site. It appears to be hard to locate. The Tax Policy Center, for its 2006 figures, cites http://www.irs.gov/pub/irs-drop/rp-05-70.pdf as the source of its figured. The document's header says "26 CFR 601.602", and a bit of sleuthing reveals that CFR is the Code of Federal Regulations, and that title 26 pertains to "Internal Revenue". I don't want to cite this document in the article, however, because I don't understand its legal status. Is it the sort of thing that could be ammended after publication, for instance? I don't know. There should really be a more nicely formatted document out there, one with a header that would make it trivial to discern what the document is about and who publishes it. -- Ryguasu 26 January 2007

[edit] Graphs?

I've seen a few presentations of the EITC that include a graph of how the credit varies with income. I'm wondering if one would be appropriate here. http://www.cbpp.org/4-10-06tax.htm has an example graph. This graph has the caption "Source: Congressional Budget Office", which might mean the graph is produced by the Office, in which case it's in the public domain. But maybe we'd need to make our own graph. Ryguasu 03:39, 27 January 2007 (UTC)

[edit] Rename this article

This article should be renamed to Earned Income Tax Credit (note the capitalizations). ~ UBeR 01:08, 13 February 2007 (UTC)

[edit] Euros?

"the UK EITC is worth up to 6150 Euros" - given that the UK does not use the euro, and so the exchange rate is variable, a date should have been included here to say *when* it was €6150. 81.159.58.245 02:08, 26 May 2007 (UTC)

[edit] "Additional Child Tax Credit" as kind of an EITC

You receive a $1,000 child tax credit for each child age 16 and below. Now, what if you can't use all your credit(s) because you don't have that much tax liability? The answer, you might be able to get some of it refunded to you anyway. The rule for 2006 is 15% of your earned income over $11,300 can potentially be refunded as "Additional child tax credit" (line 68). This is a more generous rule than it used to be. And, at this point, it begins to look like an earned income credit, yeah, a whole lot like an earned income credit. And the practical effect is to prolong the phase-out of EITC. (Graphs would be nice to show how all this interacts. And also case studies, like what they do in textbooks with hypothetical taxpayers.) FriendlyRiverOtter 23:19, 15 August 2007 (UTC)

[edit] RALs, H&R Block, Tax Season 2003, “debt offset,” 2 out of 100

RAL is a Refund Anticipation Loan. I worked in a New England branch of H&R Block from January to April 2003 and did about 220 individual returns.

First the good parts. Some of the customers were an absolute delight and would tend to really open up toward the end of the interview. One farmer, after we had talked about animals earlier, showed me a picture of his cat and said, 'That's my Friend.' One young woman, who was making pretty modest income that year, shared with me her hopes of going to nursing school. And my co-workers impressed me as very dedicated individuals. Looking back on a number of discussions, Wow, we really wanted to get it right. As it ended up, since we were in a college town, the single most useful bit of advice that I was able to give clients was, Yes, you can still get it with a loan. As long as you are responsible for the debt, you can still get either the Hope Scholarship Credit or the Lifetime Learning Credit for tuition paid for by a student loan (as long as you qualify otherwise of course!).

What wasn't so cool were the refund loans. First off, the interest rates were really high, "85% interest," "65% interest," "126% interest." And then, these interest rates were not disclosed until the end of the whole process, when the client had already done an half hour's work in answering questions, many of them personal.

Then there were fees that were not included in the interest rate. There was a fee on the part of H&R Block and there was a bank fee, the two of them totalling just shy of 61 dollars. These were over and above the actual tax prep fees.

Then, two people had ALL of their money taken by the bank! This was called "debt offset," and that's all the information the bank would tell either the client or us when we called. This wasn't child support. This wasn't a delinquent student loan. This was the bank collecting consumer debt, either credit card, cell phone, whatever (this industry practice is also called "cross collection"). One man was due a refund of about $1200 and got none of it from the bank. One lady was due a refund of about $4500 and got none of it from the bank. She was in tears on the phone. They were both my clients. Out of my grand total of 220 clients for the season, these two were in a subset of approximately 100 who took a bank product. So maybe someone who's good in statistics can tell us, if we hit two times out of a hundred in a sampling, what's the range it easily could hit if that sampling is taken many, many times, and what's our percentage confidence in that interval. To me, it could easily have been zero, it could have easily been five.

And no, this was not adequately disclosed. It was buried in a long loan application in vague language.

The bank was Household Finance. They are one of a few large banks who serve Block and other large national tax preparers. The situation is more of an oligopoly than it is of genuine competition.

I don't think we can fully discuss Earned Income Credit without discussing RALs. When we discuss the big aggregate numbers (and we're a big country with 300 million people, and just like with Social Security, the aggregate numbers are going to be big numbers), a certain percentage of that money is being skimmed off the top and going to banks. In fact, a case could be made that RALs are the engine which drive the tax prep industry.

(People's most common complaint was that they did not get the loan after having their hope built up, and seemingly for stupid reasons when they had a perfectly good tax return. They then didn't have to pay the interest, but they were still stuck with the bank and had to pay the account fees. They got their money--most times!--when the IRS issued the refund in one to two weeks.)FriendlyRiverOtter 20:36, 11 February 2007 (UTC)

[edit] Different company, 2007, “cross-collection,” 0 out of 75, probably

I worked for another national tax preparer in a later year. Out of approximately 75 clients of mine who took out a loan product, none of them got hit with cross-collection, I think. I do not know this for absolutely sure, since the office was not as open and participatory as the previous one, but I’m reasonably sure, and I’m going to go with those numbers: 0 out of 75.

If we consider the population to be all persons who took out loan products for their tax refunds during the previous five years, my two experiences can be viewed as small samples. Someone excellent with statistics could give us an estimated range of where the entire population is likely to fall, say within 95% confidence. I suspect that this estimated range will be somewhat broad.

And I wish to apologize to you, my reader, for not including this information earlier. I had originally wanted to write a narrative like the above (a narrative that might give ideas for Internet searches), but the situation was just too messy, awkward, and personal. FriendlyRiverOtter 21:14, 29 October 2007 (UTC)

[edit] Links regarding "RALs" (Refund Anticipation Loans)

consumeraffairs.com
Paul of Cincinnati OH (01/28/07):
"Me and my family came here to file out taxes, like we have done for the last 15 years. This time the person servicing us stated that WE have a new bank product this year. Your ral in 1-2 days guaranteed! we have used there services for years and allways have gotten rapid refund in as little as 3-6 days. We trusted their product and tried it this year. on 1-26-07 the HR branch stated that we didn't qualify for RAL. This is a first in 15 years!!!! We were denied for internal bank reasons! They would give any contact numbers for the bank. And they also couldn't or wouldn't look into a refund of $346.76 in tax and bank fees. This has cost our family a lot of financial grief this time. This has never happened before and it wont happen again. These services that this company is offering is geared toward people with low income who cannot afford to pay the $100 upfront to get there taxes done and a refund in 10 days." [2]

National Taxpayer Advocate's 2007 Objectives Report to Congress, Volume II, The Role of the IRS in the Refund Anticipation Loan Industry (pages 11-12): " . . .It is also interesting to note that federal law prohibits banks from exercising their right to offset Social Security benefits for the recipients’ defaulted loans to that bank.[45] It would make sense to protect EITC funds in a similar manner. At the very least, banks should be barred from transferring EITC under a cross-collection arrangement to satisfy a debt owed to a third party bank.[46] . . . " [3]

Taxpayer Advocate, 2005:
"8. Refund Anticipation Loans . . . The IRS contributes to the demand for Refund Anticipation Loans (RALs) by: (1) failing to deliver refunds in the quickest manner possible and (2) failing to provide RAL alternatives for the 'unbanked.' It is also unclear if RAL customers fully understand the ramifications of cross-collection provisions in standardized RAL contracts . . . " [4]

Illinois Attorney General:
"Who Takes the Hit? According to a recent study by the Consumer Federation of America and the National Consumer Law Center, taxpayers lost more than $1 billion in loan charges and fees in 2002. The consumers paying the highest price for these RALs are low-income families that cannot afford to pay a significant portion of their tax refund in loan fees and interest. In fact, the same study found that 40% of RAL customers qualify for the Earned Income Tax Credit. In 2002, these customers paid an average of $248 in costs and fees to receive an RAL on expected tax refunds that averaged $1,980. It is a vicious cycle of fees for a consumer who needs an instant refund or RAL. To get an RAL, consumers often pay a loan fee, an electronic filing fee, a document preparation fee and a tax preparation fee. Then when the consumer receives a loan check, he often pays an additional check-cashing fee." [5]

Hood v. Santa Barbara Bank & Trust (2006), Cal.App.4th
" . . . The Jackson Hewitt employee did not explain that these options were loans . . . The RAL application consists of four pages, each containing two columns of very fine, single-spaced text. The cross-collection provision appears as section 6, at the bottom of the second page . . . Rosenthal Fair Debt Collection Practices Act . . . Consumers Legal Remedies Act . . . Unfair Competition Law . . . Both the deposit-taking regulation and the lending regulation 'exempt' or 'save' state contract, tort, and debt collection laws from preemption . . . ” And thus, this California appeals court reversed the previous dismissal of the case. The case can now go forward to jury trial (pending further appeals of course!). [6] [7]

consumer-action.org, Feb. 5, 2007:
“ . . . Thus, in 2007, a consumer can expect to pay from $57 to $104 to $111 in order to get a RAL for a typical refund of about $2,500. The effective APR for this RAL would be 85% to 150% to 170%. The RAL loan fee is in addition to tax preparation fees averaging $150 and, in some cases, an application fee of about $40. The major commercial chains have stopped charging this fee, but independent tax preparers may charge a fee and they have a substantial portion of the tax preparation market. . .” [8]

California Attorney General sues H&R Block, February 2006:
“ . . . H&R Block does not adequately tell such customers about any alleged debts, or that when they sign the new RAL application, they agree to automatic debt collection – including collection on alleged RAL-related debts from other tax preparers or banks. These applications are denied, and the customer’s anticipated refund is used to pay off the debt, plus a fee . . . " [9] FriendlyRiverOtter (talk) 05:31, 7 January 2008 (UTC)

Bank One Tax Related Products, for the 2006 tax season, page 44:
" . . . including HSBC Bank USA, N.A., Beneficial National Bank, Household Bank, f.s.b., Santa Barbara Bank and Trust, County Bank, First Bank of Delaware, First Republic Bank, First Security Bank, Republic Bank & Trust Co., Republic First Bank, Imperial Capital Bank, or any of their successors or assigns . . . " [10]

[edit] Globalize or U.S.

I was going to add a {{UStaxation}} template to the article as it was in the Taxation in the United States Category but it seems like it may be a global article, yet it starts with U.S. If it is a global article, I would change the CAT to just Taxation and add the {{Public finance}} template. Morphh (talk) 2:13, 04 February 2008 (UTC)

[edit] Impact: "Economists suggest..." -- does this count as a source?

I may have found the origin of this passage -- the first part is a word-for-word match for http://acorn.org/fileadmin/ACORN_Reports/State_Reports/massachusetts.pdf . Possibly some other regional report is the origin as that would explain the different dollar number. My question is whether that is an acceptable source under Wikipedia's guidelines. It's not really an authority on economics and I don't know what their source is. 24.118.231.159 (talk) 19:17, 17 March 2008 (UTC)

I'm all in favor of adding more texture and more color to the article, provided we don't show so much deference to the status quo. That seems to be the default position of wiki. We very quickly and very nervously decide what the 'mainstream' view is, then we seemingly demand huge evidence to move millimeter from it.

By all means, identify the quote as ACORN, and include a very juicy ACORN quote (even if it's long), and a number of other interesting quotes as well. It's not just two sides. Like a gem, there are many interesting sides. FriendlyRiverOtter (talk) 01:23, 19 March 2008 (UTC)

[edit] EIC and FICA

The EIC was introduced in 1974 as a way of refunding the employee portion of the FICA/Medicare (hereinafter "FICA") tax paid by low income people whose income was (almost) entirely wages. The table in the entry reveals that this is stil the case for households with no children earning less than $5600/year. The giveaway detail is that the EIC rate of 7.65% is the same the employee's FICA tax rate.

Only starting in 1993 did it become possible for some households with children to receive substantially more EIC benefits than the amount of FICA tax they and their employers had paid over the year. The present EIC rates are 34% (1 child) and 40% (>1 child) exceed the effective FICA tax rate of 0.153/1.0765 = 14.2%. According to the instructions for the 2007 1040 long form, the largest possible EIC payment a married (filing jointly of course) taxpayer could receive with:

  • One child was $2853 on an income of $8400. Total FICA tax owed on that income is $1194.
  • More than one child was $4716 on an income of $11750. Total FICA tax owed on that income is $1670.

Hence much of the $50 billion of EIC benefits paid out nowadays can be still seen as a complete or partial refund of FICA taxes paid. For taxpayers with children, someone should calculate the income level where EIC entitlement = FICA owed. The income levels at which EIC entitlements start to decline are higher for married than for single taxpayers.

I welcome edits to the entry, fleshing out what I say here. With sources of course!123.255.60.35 (talk) 20:06, 6 June 2008 (UTC)