Earned income credit

[jodi]

First, a disclaimer: I am not asking for technical, legal, tax advice - only for ideas. I realize that I am not talking to attorneys, CPAs, etc. and just want to bat a few ideas around.

Now that I have that out of the way

DH and I are just over the EIC limit, which we were able to claim last year as he was still a student and not making any money. Our AGI stands at $39,522, but our actual earned income is about $40,500. The EIC limit for a family of 4 is $39,783. I had thought that the EIC was based on AGI, but reading up on the credit suggests that it is based on "your adjusted gross income and your earned income" (from Turbo Tax). I read that I can reduce my AGI by contributing to a traditional IRA, but I assume that will not affect my actual earned income. Does anyone know if there is anything I can do at this point that can (legally, of course) lower my earned income - leading to the next (and more interesting) question - is this even ethical for me to consider?

Edited to add: We cannot itemize as we don't have enough deductions to even come close to the standard deduction (no house, no major medical expenses, etc).

[moneybags]

I think both your AGI & earned income need to be below the limits. On irs.gov you can enter your info to see if you qualify.

leading to the next (and more interesting) question - is this even ethical for me to consider?

It is certainly ethical to consider lowering your taxes as long as you remain within the law.

[MonkeyMama]

I think both your AGI & earned income need to be below the limits. On irs.gov you can enter your info to see if you qualify.



It is certainly ethical to consider lowering your taxes as long as you remain within the law.

Agreed.

In general, IRA contributions are a good way to get down AGI for other tax breaks. (HSAs also). BUT off the top of my head, when it comes to earned income credit, you have to worry more about "Earned income" than AGI. I say there is not much you can do. (Not much you can do to change the money you earned).

IF you face something similar for 2008 I would try to earn a little less, for sure. I mean earning a few hundred less could save you much more in the long run. Depends how lucrative the credit is in your situation...

[jodi]

Who knew that selling just one more house would turn out this way? The only thing I can think of would be to scrounge around to see if I missed any expenses related to my real estate business. I *think*, although I may be wrong, that my expenses there would lower my net profit for the business. I think my gross was just over $8k, but after my real estate expenses, mileage, license fees, etc. my actual net profit was about $5500.

Kinda wishing I hadn't sold that last house now I'll have to keep better track for this year. If DH doesn't land a FT teaching position in the fall, we'll probably be close again.

Can anyone tell me what the EIC would be worth? I think it got us about $4k more last year, but I don't know if it's tied to income (i.e. sliding scale based on income) or a flat credit for everyone.

[Diolla]

The EIC is a bell curve with really low incomes not getting much and high incomes, near the limit, not getting much. You were probably better off making more money than getting the EIC if you were close to the limit.

The EIC is a great boost for working people with lower incomes but it is designed to 'phase out' as your income increases.

[zetta]

Since you used TurboTax, it should be pretty easy to make a copy of your tax return, name it "what if", and see what would happen if your income had been a little lower, or you contribute to an IRA, or you find some more business expenses.

[jodi]

Thanks for the info. I've tinkered a little in Turbo Tax, getting maybe $300-400 more if I can take my income down by $1000-1500 (just under the limit for EIC), but not the huge jump that we saw last year with the EIC. It would make sense if the credit phases out with income. Since that is the case, it seems like it probably won't affect our bottom line a whole lot to get it anyway.

[Diolla]

You probably would still qualify for the Saver's Credit, it is based on AGI and gives you a percentage credit for any money you put into a voluntary retirement account. For instance you put $1000 into a Roth IRA (or traditional or 401(k) etc...) and get a $100 credit on your taxes. It does cut off at a certain income level but with the income numbers you talked about you would have qualified for it this year and could still if you make a 2007 contribution before April 15th.

[jodi]

Yup, we do get that credit. I played around with the numbers a bit, and we are getting $400, which I think is the max (we've already reached this based on my Roth contributions alone). I put in some higher numbers, but it didn't go up. Thanks!

[Diolla]

Yup, we do get that credit. I played around with the numbers a bit, and we are getting $400, which I think is the max (we've already reached this based on my Roth contributions alone). I put in some higher numbers, but it didn't go up. Thanks!

Good for you! Most people overlook it. I believe you are right it maxes out at a pretty low amount (compared with the EIC) but every bit helps.

[jodi]

Well, I can't take credit for it myself. Turbo Tax did it for me. I don't know what I would do without Turbo Tax