Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 8, 1993 TAG: 9302060177
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE: JIM LUTHER ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Long
EARNED-INCOME, CHILD CARE CREDIT CAN REDUCE TAX BILL
Everyone has heard about those taxpayers who understate income or exaggerate deductions. But some people actually fail to claim a major tax break to which they are entitled - and they are among those who need one most.Every year the IRS and scores of organizations combine efforts to remind low-income families of the earned-income credit and child care credit.
More than 13.8 million couples and individuals claimed the earned income credit on returns filed in 1992, but hundreds of thousands of qualified families didn't claim it.
The credit was created to reward low-earning families for staying off the welfare rolls and to help them offset their Social Security taxes. It has been expanded to provide additional help with medical insurance and for those with newborn children.
For 1992, families with income below $22,370 are eligible for at least a partial benefit. The maximum credit is $2,211.
The credit is unique: It can wipe out your entire income tax liability, and if your credit is larger than your liability, the government will send you a check for the difference.
The credit is claimed on Schedule EIC with either Form 1040 or 1040A. The calculations can get complicated, so the IRS volunteers do the arithmetic if qualified taxpayers will simply fill in the first page of Schedule EIC.
The IRS will do the rest.
You still will have to determine whether you are eligible and which of your children qualify. But the IRS instructions on Schedule EIC make that process fairly simple.
Who is eligible?
In general, any working family whose earnings - wages, tips and income from self-employment - were under $22,370; whose adjusted gross income (which is earnings minus such adjustments as alimony paid) was under $22,370; and which has at least one qualifying child.
The credit is available to couples filing joint returns; single people; and qualified heads of household, but not to couples filing separately.
A qualifying child is one who on Dec. 31, 1992, was under the age of 19, or was under 24 and a full-time student, or who was permanently and totally disabled regardless of age. The child must have lived with the family in the United States for more than half of 1992, or all year if a foster child.
The maximum basic earned-income credit is $1,324 for a one-child working family, or $1,384 for two or more children. There is an additional maximum of $376 when a child under 1 is involved, and up to $451 for health insurance.
The maximum basic credit is reached when earned income is $7,500. Once income reaches $11,880, the credit begins dropping until it ends at the $22,370 level.
There is another restriction for those who claim the supplemental credit for a child under age 1. If you had to pay a child-care worker last year so you could work, you will have to choose between the supplemental credit and the dependent-care credit.
The tax saving for the dependent-care credit can be as much as $1,550 a year for families using employer-provided day-care services, or up to $1,440 for those claiming a dependent-care credit. Calculation of both may be necessary to determine which is more beneficial.
The credit offsets part of the expense of hiring someone to care for a child, a parent or other dependent. The benefits are claimed on Form 2441 if you file the long Form 1040, or on Schedule 2 if you file Form 1040A.
Here is how the two options work:
You may accept tax-free up to $5,000 a year worth of dependent-care services provided by your employer. It must be offered in a written plan that does not discriminate in favor of high-income employees. For most taxpayers, who are in the 15 percent bracket, the maximum tax saving is $750, although upper-middle-income families, who are in the 28 percent bracket, can save $1,400 and top earners, $1,550.
The $5,000 can include benefits that you pay for in a "flexible spending arrangement" or "salary-reduction plan."
Under such a plan, your employer withholds prearranged amounts from your paychecks and the money is set aside to reimburse you for dependent-care expenses. Those dollars escape Social Security and income taxes. But know your costs in advance because you lose any money in the account that is not paid out by year end.
You may be able to take a tax credit of up to $720 for one dependent or up to $1,440 for two or more. The credit is calculated on a maximum of $2,400 of eligible expenses for one child or $4,800 for two or more. The maximum credit is 30 percent and drops gradually as income rises, to a minimum of 20 percent for those with adjusted gross income over $28,000.
For example, if your 1992 income totaled $44,000 and you paid $6,000 for the care of two children, your benefit would be determined by multiplying the first $4,800 of expenses by 20 percent, yielding a tax credit of $960. That is subtracted directly from tax owed.
Any assistance paid by your employer or under your salary-reduction plan must be subtracted from eligible expenses before the credit is calculated.
Here is how the credit works:
QUALIFICATIONS. You may be eligible if, to work or seek work, you have to hire someone to care for a dependent child who is disabled or under age 13; any other dependent, such as an elderly parent; or a spouse who is not capable of self-care. You must have furnished more than half the cost of maintaining a home for the dependent last year.
YOUR WORK. You and your spouse (if capable of self-care) must have had earnings in 1992. This requirement is met if one spouse was a full-time student during a part of each of five months during the year and the other spouse worked.
EXPENSES. You may include services of a housekeeper, maid or cook but not a gardener or driver. Costs of the dependent's food and clothing are not eligible, although you may count the costs of feeding a live-in housekeeper. You may include expenses of nursery school or day care outside the home for a child under 13, but only the portion that pays for care - not education.
The total of expenses may not exceed your earned income - wages, tips and the like. If you are married, these allowable expenses must be no more than the income of the spouse who earned less.
The credit may not be claimed for dependent-care payments to your child under the age of 19 or to any person who can be claimed as a dependent by you or your spouse.
A free IRS publication, No. 503, explains the credit.