Tax planning for low income taxpayers - an oxymoron? Definitely not!
Traditionally, many accountants have overlooked tax planning for low income taxpayers. Understandably, many of these taxpayers don't have the wherewithal to afford consulting sessions with an accountant, so this type of planning is commonly overlooked.
Here are some important tips for those taxpayers to keep in mind:
1) Keeping investment income under the EITC (Earned income credit) eligibility limit. The EITC can be worth up to $6,728!
In the past (before 2020), investment income more than $3650 would have disqualified a taxpayer from claiming the EITC. This has quite a few families to miss out. For 2021 and forward, the amount has been changed to $10,000 , so not as big of a problem - but if someone won big in the stock market ,they definitely need to think about being careful about this. Holding onto some stock until the next tax year could avoid this problem. Capital gains in mutual funds can also lead to problems. Dividends as well.
Received a big wedding gift/inheritance and put it into a mutual fund? You need to watch out for this.
2) Maximize your child tax credit - many low income families are dismayed to hear that income reported on a 1099 is actually considered self-employed income, and that their child tax credit will go to covering the self employment taxes. Any leftover child tax credit ends up not being refundable, unless one spouse has a regular W-2 job (or foreign wages). This problem can be avoided by keeping in mind to pursue specifically non-freelance type jobs.
Recently, freelance-style jobs have been available at a growing rate - but be careful to look our for a "real" job which will not be subject to self-employment taxes. Sometimes a valued long-term freelancer who works only for one company can convince the management to actually hire them. This is especially true in the current job market with severe worker shortages; employers want to do everything to keep their workers happy.
3) Make sure to obtain social security cards for your children ASAP! For US-born children, social security cards are usually applied for in the hospital along with the birth certificate application. However, for foreign-born US citizen children, a social security card needs to be applied for at the US embassy or consulate.
Sometimes parents forget to apply for a social security card along with a passport and Consular report of birth abroad. Commonly, when the child also has another citizenship, parents forget to get around to applying for their baby's US documents. This has resulted in many families missing out on the child tax credit, due to children not having been issued social security cards before the tax return due date.
Embassies have been known to lose social security card applications, so if 6 months have passed and still no card arrived, time to contact the embassy and possibly reapply.
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