February 27, 2003

 

Legislative Changes Could Mean Greater Refunds In 2003

Workers filing tax returns in 2003 may be delighted to find several tax credit changes. Many families previously ineligible for Earned Income Credit, as well as the Child Tax Credit may now qualify to claim benefits, according to Debra Pankow, North Dakota State University extension family economics specialist.

In 2001, Congress implemented four changes to simplify EIC eligibility rules. The original four rules and their modifications are listed as follows:

• Foster Child Residency – "To claim a foster child for the EIC, a foster parent previously had to live with a child for the full 12 months of the year. Under the new rules, the foster child must live with the worker for ‘more than half of the year,’ the same period of time as for any qualifying child."
• Claims By Custodial Parents – "Working parents living with relatives whose incomes are higher than their own may now benefit from the EIC. Under previous rules, if a parent and grandparent, for example, could claim the same qualifying child (because the child was both the son and grandson, for instance) EIC eligibility went to the worker with the highest income. If the parent earned less than the grandparent, her claim could be denied even if the grandparent did not claim the child for the EIC. Now, a parent’s claim takes precedence over a claim by a non-parent. However, if the parent chooses not to claim the EIC, another eligible relative living with the child can claim the tax benefit. (In the case of unmarried parents living with a child, if each parent lived with the child for more than six months of the year, then the EIC must be claimed by the parent with the highest income.)"
• Definition of Earned Income – "For most EIC claimants, earned income for EIC eligibility is simply their taxable earnings from work. However, several forms of non-taxable income were also considered earned income for purposes of the EIC until 2002. This included, for example, pre tax salary reductions workers make to contribute to an employer-sponsored retirement plan or dependent care assistance plan. Housing and subsistence allowances for military personnel, though non-taxable, were also considered earned income. Beginning in 2002, earned income includes only wages paid by an employer or net self-employment income. Most workers affected by this change will receive a larger EIC benefit than they would have otherwise."
• Adjusted Gross Income – "Adjusted gross income (AGI) is used to determine a worker’s tax liability. AGI includes a worker’s earned and other taxable income, minus certain losses such as business expenses. However, to claim the EIC, workers were required to determine their ‘modified AGI,’ which required 75 percent of such losses, as well as certain types of tax-exempt income, to be added back into total income. The higher income level might then exceed EIC maximum income limits and disqualify a worker, or reduce the amount of EIC benefit for which a worker qualified. Beginning in 2002, the standard AGI definition will be used to determine EIC eligibility."

In addition, Congress has also extended the income level at which married workers can continue to receive maximum benefits. Married workers…

• earning less than $30,201 and living with one child may receive up to $2,506.
• earning less than $34,178 and living with two or more children may receive up to $4,140.
• earning less than $12,060 and living with no children, and falling between the ages 25 and 64 may receive up to $376.

Single workers of similar status have income level requirements that are $1000 less than the figures listed above.

Furthermore, workers who earn more than $10,350 and claim a child under age 17 may be eligible for the Child Tax Credit, with possible returns of up to $600 per child. Eligibility rules for the Child Tax Credit differ from EIC rules, but many workers can receive both tax credits.

For more information about EIC eligibility rules and the new Child Tax Credit, contact the Internal Revenue Service at 1-800-829-1040.

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Source: Debra Pankow, (701) 231_8593, dpankow@ndsuext.nodak.edu
Writer: Teresa Oe, (701) 231_8371, teresa.oe@ndsu.nodak.edu
Editor: Rich Mattern, (701) 231_6136, richard.mattern@ndsu.nodak.edu