Tax Credits for  Working Families

Tax Credits for Working Families PowerPoint PPT Presentation


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Credits Versus Deductions. DeductionsAmount of deduction is subtracted from income to compute tax baseDeductions reduce tax liability by the amount of the deduction times the tax rate Example:$1,000 deduction in 15% tax bracketReduces taxable income by $1,000Reduces tax liability by $150. C

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Tax Credits for Working Families

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1. Tax Credits for Working Families Katherin Ross Phillips ([email protected]) The Urban Institute Strengthening Immigrant Families and American Communities: Crosscutting Approaches Grantmakers Concerned with Immigrants and Refugees December 10, 2001

2. Credits Versus Deductions Deductions Amount of deduction is subtracted from income to compute tax base Deductions reduce tax liability by the amount of the deduction times the tax rate Example: $1,000 deduction in 15% tax bracket Reduces taxable income by $1,000 Reduces tax liability by $150 STRESS: DEDUCTION IS AN ADJUSTMENT TO INCOME STANDARD DEDUCTION: 7,600 Married joint 6,650 Head of HH 4,550 singleSTRESS: DEDUCTION IS AN ADJUSTMENT TO INCOME STANDARD DEDUCTION: 7,600 Married joint 6,650 Head of HH 4,550 single

3. Credits Versus Deductions Credits Amount of credit is subtracted from tax liability Credits can reduce tax liability dollar for dollar Credits may be refundable Example $1,000 credit in 15% tax bracket May reduce tax liability by $1,000 If refundable, could result in $1,000 added to refund STRESS: DEDUCTION IS AN ADJUSTMENT TO INCOME CREDIT IS AN ADJUSTMENT TO TAX LIABILITYSTRESS: DEDUCTION IS AN ADJUSTMENT TO INCOME CREDIT IS AN ADJUSTMENT TO TAX LIABILITY

4. Refundable Credits Reduce tax liability Can provide additional income if amount of credit exceeds tax liability Typically do not affect eligibility for means-tested benefits Potential for “Building Wealth” WHY ARE REFUNDABLE CREDITS SPECIAL? WHY ARE REFUNDABLE CREDITS SPECIAL?

5. Available Tax Credits Refundable The Earned Income Tax Credit (EITC) Child Tax Credit Some state EICs Non-Refundable Child and Dependent Care Tax Credit Temporary Credit for IRA contributions Education Credits (Hope, Lifetime Learning) Others

6. The EITC Refundable tax credit for workers with low and moderate incomes Available only to families with earnings Currently the largest cash transfer program for low-income parents Non-administrative program costs = $30.8 billion (1998) ($26.3 billion refunded) State and federal cash assistance under TANF = $14.6 billion (1998) Expansion and simplification in new tax law

7. Eligibility Criteria for EITC Earnings Low to Moderate Income Investment income less than $2,450 Cannot file as “Married filing separately” Special Considerations for Immigrants Valid social security number U.S. citizen or resident alien all year Qualifying child/age of filer QUALIFYING CHILDREN MUST ALSO HAVE A VALID SSN. ITIN (INDIVIDUAL TAX IDENTIFICATION NUMBER) IS NOT SUFFICIENT ATIN (ADOPTION…) is also not sufficient.QUALIFYING CHILDREN MUST ALSO HAVE A VALID SSN. ITIN (INDIVIDUAL TAX IDENTIFICATION NUMBER) IS NOT SUFFICIENT ATIN (ADOPTION…) is also not sufficient.

8. EITC Parameters, 2001 TWO KIDS: 1-10,020 (0.34/$) 10,021-13,090 (MAX CREDIT = 4,008) 13,091 -32,120 (-.2106/$) ONE KID: 1-7,140 (0.34/$) 7,141-13,090 (MAX CREDIT=2,428) 13,091 - 28,280 (-.1598/$) NO KIDS: 1 - 4,760 (.0765/$); 4,761-5,950 (MAX CREDIT=364); 5,951-10,709 (-.0765/$) TWO KIDS: 1-10,020 (0.34/$) 10,021-13,090 (MAX CREDIT = 4,008) 13,091 -32,120 (-.2106/$) ONE KID: 1-7,140 (0.34/$) 7,141-13,090 (MAX CREDIT=2,428) 13,091 - 28,280 (-.1598/$) NO KIDS: 1 - 4,760 (.0765/$); 4,761-5,950 (MAX CREDIT=364); 5,951-10,709 (-.0765/$)

9. The Child Tax Credit Partially refundable tax credit for families with children Major changes in the 2001 tax law Refundable for families with earnings over $10,000 Annual maximum credit increases Formula becomes more generous in 2005

10. Eligibility for CTC Non-refundable portion Families with qualifying children Claimed dependent under the age of 17 Son, daughter, grandchild, stepchild, foster child U.S. citizen or resident alien Refundable portion (Additional CTC) Families with qualifying children and taxable earnings in excess of $10,000

11. Value of CTC

12. Putting the Credits Together ASSUMES NO TAXES PAID DURING THE YEAR STRESS THE 12.5 K AND THE 25 K EXAMPLES IN BOTH SLIDES.ASSUMES NO TAXES PAID DURING THE YEAR STRESS THE 12.5 K AND THE 25 K EXAMPLES IN BOTH SLIDES.

13. Putting the Credits Together HIGHLIGHT THAT THE COUPLE EARNING 30K ALSO RECEIVE A REFUNDHIGHLIGHT THAT THE COUPLE EARNING 30K ALSO RECEIVE A REFUND

14. How Can Eligible Families Get the Refundable Tax Credits? EITC File a Schedule EIC with annual tax return Apply to have a portion of EITC added to each paycheck Child Tax Credit File Form 1040 or 1040A with child tax credit worksheet File Form 8812 for refundable portion

15. What if the Family Doesn’t Need to File Taxes?

16. Importance of Outreach Credits are available to families who are not required to file taxes Complex filing requirements and eligibility rules for both credits CTC involves some cumbersome calculations Many states have EICs that are based on the federal EITC

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