Proceed cautiously when claiming the Earned Income Tax Credit this season
What’s the latest on the Earned Income Tax Credit for my 2023 Return?
— H.R.B., Plymouth, IN
The Earned Income Tax Credit (EIC) is a mixture of the good, the bad and the ugly.
The GOOD
The EIC is a refundable credit that provides real dollars to low- and medium-income taxpayers. Some examples:
• Single taxpayer with two children: EIC at an AGI of $24,000 = $6,910. Assuming 2,000 hours worked that's a non-taxable work bonus of over $3.45/hour.
• Head of Household taxpayer with two children: EIC at an AGI of $28,000 = $5,242. A non-taxable work bonus of over $2.62/hour.
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• Married Filing Jointly taxpayer with three children: EIC at an AGI of $30,000 = $7,028. Which tallies to a non-taxable work bonus of over $3.50/hour.
The amount of EIC is dependent on 3 factors: filing status, Adjusted Gross Income and number of qualifying children. For 2023, the following parameters apply:
• Three or more qualifying children with valid SSNs. Earnings less than $56,838 ($63,398 if married filing jointly)
• Two qualifying children with valid SSNs. Earnings less than $52,918 ($59,478 if married filing jointly)
• One qualifying child who has a valid SSN. Earnings less than $46,560 ($53,120 if married filing jointly)
NOTE: Taxpayer(s) who don't have a qualifying child can earn less than $17,640 ($24,210 if married filing jointly).
The BAD
Because of the "moving parts” described above, the EIC isn’t always easy to compute. Publication 596, focusing on the EIC, walks taxpayers through 15 different "rules" that can be "in play" when computing the credit.
The IRS is willing to calculate the EIC for you (see Form 1040 instructions for Line 27). Alternatively, to figure the EIC yourself, use the EIC Worksheet in the Form 1040 instructions. In addition, if you have a qualifying child, you must complete Schedule EIC as part of your return.
Complex EIC rules have increased the improper EIC claims rate from 24% (in 2020) to 32% (in 2022), according to a recent IRS study.
The UGLY
There are disparities in EIC audits vs. other types of audits. Although it is true that high income taxpayers (those with incomes over $1million) face higher audit rates than all others earning less, EIC claimants are audited at a rate 5.5 times that of the general population. A combination of factors contribute to this, including: (a) the ease of computing and confirming this credit vs. the complexity and staffing required to conduct a high-income audit and; (b) the significant increase in the improper claims rate mentioned above.
If the IRS denies or reduces your EIC for a tax year for any reason other than a math or clerical error, your life likely gets more complicated with your next filing. Namely, you must include Form 8862, Information to Claim Certain Credits After Disallowance with your next tax return.
You can also be banned from claiming the EIC if flagrant disregard of the rules or fraud is involved.
You can’t claim the EIC for: a) 2 years after the IRS makes a decision to reduce or deny your EIC due to reckless or intentional disregard of the rules, or b) 10 years after the IRS makes a decision to reduce or deny your EIC due to fraud.
Ken & Klee's Tax Notebook
The Inflation Reduction Act of 2022 provided the IRS with considerable additional funding, which has been used to supplement its workforce, providing enhanced phone support, more assistance sessions on Saturdays in a number of locations (at least monthly), and adding processing staff to handle the expected almost 129 million individual income tax returns. Ninety-eight percent of filers now file electronically. The IRS advocates electronic filing and direct deposit for faster refunds.
This past President's Day weekend typically marks a peak period for IRS phone lines, as people in increasing numbers prepare their tax returns. The IRS recommends turning first to the self-help tools available online on IRS.gov to avoid delays (visit https://www.irs.gov/help/tools).
Tax Talk is an outreach service of the Notre Dame-Saint Mary’s College Vivian Harrington Gray Tax Assistance Program (TAP).
Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact Rick at rklee@nd.edu.
Ken Milani, a professor of accountancy at Notre Dame, co-founded the TAP and served as its faculty coordinator for 39 years. Contact Ken at milani.1@nd.edu.
E-mail questions to either.
This article originally appeared on South Bend Tribune: Tax Talk: The Good, the bad and the ugly of Earned Income Tax Credit
