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Saturday, January 20, 2007

The magical earned income credit

I'd sorta mentally planned on blogging tax tips Saturday nights. So we're going to try for installment number two.

Today, we're going to talk about the earned income credit. Here's the deal: Some folks get a credit based on the amount of their EARNED income. It's designed to help out the taxpayers in the lower income brackets. But since it's the "earned income" credit, it's based on the income you earn. Aka if you have no job, you ain't getting it.

I feel the obligation to explain this because every year, I get people who walk into my office, having not worked a day in the entire year, demanding their earned income credit. And when I politely explain that no income equals no credit, they get a little hostile. Just because your brother's cousin's ex-sister in law used to know someone who did taxes and that person said you get an earned income credit does not make it so.

Which leads to my other point about the earned income credit. It's a bell curve. This means that the more you earn, the more you get. UNTIL... the magic moment where you hit the top of the curve. Then it curves back down until it tapers off to nothing. Sooo... once you start making a certain amount of money, you don't get it anymore.

Today I got to explain that curve to yet another client fallen victim to *gasp* getting a raise. She was upset because she didn't get as big of a refund this year. So I had to do the math for her. Using approximate numbers here, for obvious reasons, but basically, she made $5,000 more and got back $500 less.

Now, here's the logic she didn't get. Yes, she didn't get as big of a refund, but all in all, she was still $4500 ahead for the year. And yes, I also realize how hard it must be to raise three children alone on half of what our family lives off of. Having been there (well, except for the single part), I understand how hard it is. But I don't make the rules. That would be Congress and the IRS.

My recommendation: if you don't like it, write your representatives.

Until then, please remember what the earned income credit is-and isn't. It's designed to give a hand up to taxpayers with minimum income, and once they start to reach higher income levels, that hand up tapers off. And yes, we can argue about whether or not those amounts of money can really be constituted livable or higher income. However, I don't set those limits. Again, I refer you to Congress.

There you have it-earned income credit in a nutshell. Next week, I'll have another fun little tidbit for you. And if you do have tax questions, do post or email me or whatever, and maybe it can be a future topic of the week. :)

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