 Income tax 2022-2023. Earned income tax credit the EIC with three or more children tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example. Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov, starting point. Single filer Mr. Anderson livin' 90210 Beverly Hills, 100,000 W2 income which is way over the threshold for the Earned Income tax credit. But that's our traditional starting point, so that's where we'll start. We've got the 12,950 on the standard deduction 87,050 for the taxable income. Page number two, calculated the tax at 14774, 15,000 for the payments. That gets us to our 226. Let's go back to page one. We want to think about an Earned Income tax credit if we had three qualifying children or more because the Earned Income tax credit doesn't give any more benefit past those three children. So we'll think about that remembering that. You typically want to think about the curve in terms of how high your income is and what they support. Accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Maximum credit will be per area or per level of one child or zero children, one child, two children, three or more children. And then it's slightly different as well if you're married or not married, although it's not doubled when married. And therefore, especially when we get up to these higher numbers of children. You can imagine if three if someone that had three children that had head of household filing status married another person that had three children of head of household filing status, that there could be a significant decrease and the benefit from the earned income tax credit because the credit doesn't change in terms of the maximum credit. It's at the six thousand nine thirty five and the maximum income threshold doesn't double, but only goes to the fifty nine thousand one eighty seven. And you're not going to get any more benefit from the three kids. Now you'd have six kids right instead of and you're still going to cap out at three kids in order to get a benefit. So we'll take a look at that as well. And we'll try to plot out kind of a graph of what this looks like. So it's kind of interesting and just want to point out that on those major life events on the lower income side of things, if you're dealing with the child tax credit or getting a child tax credit and their income tax credit, it kind of seems like the credits are designed or intentionally or unintentionally to kind of disincentivize marriage in some cases. So you'd want to think about whether or not it would be, you know, you want to take that into consideration. So it's not like a shock. And so we'll take a look at that on the higher income side of things. Marriage is usually beneficial because most things double on the higher income side, like the standard deduction doubles and the tax tables double. Okay, so we'll dive into that as well. All right, so we know that when we add three children, that's going to be basically moving us if we were single to head of household status. So let's do that first. All right, so Mr. Anderson now head of household status on not married three kids. We've got Joe, that should be Jill, Jill, Jill. And then we just started naming them by numbers after their child number three. And then so that means that our standard deduction went up to $19,400. We still don't get the earned income tax credit because of course we are over the income threshold in order to do it. The maximum income threshold to get anything would be close to $60,059.187. So let's do our graphing thing so that we can basically see as our income goes up, what happens to this credit with three or more children. So I'm going to go back on over and say, all right, let's bring my income. Let's do increments of $5,000. Let's start at $5,000 and see what happens. We're going to say that we have $5,000. And so obviously our $19,004 is greater than that. So no taxable income, but may still get a benefit from the earned income tax credit because it's refundable. And it's at the 2261. So let's go ahead and graph this out. So here we have wages $5,000, 2261. Let's bring it up to $10,000. We'll just do increments of $5,000 and bring it on up. Just to graph it on out. Bring it on up to graph it on out. I'm going to get rid of the $15,000 withheld just so we don't have to deal with that. And that's going to give us the $4,511. So let's say, OK, now it went up to $4,511. The maximum is $6,9. So let's $6,935. Let's go up to $15,000. $15,000. $15,000. Can I get a $15,000? Can I get a $15,000? There we have it, $15,000. And that results in to $6,761. Not at the max yet. $6,761. Let's go to $20,000. $20,000. Can I get a $20,000? $20,000. $20,000. Do I see a $20,000? At $20,000, we get the $6,935. That's at the max now. So now we're at $6,935. Let's go to $25,000. $25,000. $25,000. $25,000. $25,000. $25,000. $25,000. And bring that on over. That's at now the $5,904. So we're going to see that right now. It's going back down. $5,904. That's $25,000. $30,000. $30,000. $30,000. Let's do that. Boom. That brings it to the $4851. one so four eight five one thirty five thousand thirty five thirty five thirty five thousand thirty five thousand I should have just there it is that brings it to three seven nine eight so three seven nine eight forty thousand we're getting close to the upper threshold it's going back down now of course as income goes up not four hundred thousand that's too many zeros it's only one too many that's too many two seven four five only one too many crying out loud now you got two little zeros here and you're lucky this is just a practice problem ridiculous all right calm down for forty five thousand forty five thousand let's see what happens then one six nine two one six nine two let's go to fifty thousand almost there fifty thousand boom okay so now we're at six thirty nine so six three nine and fifty five thousand is going to be over the threshold for single it's it's a higher for married but fifty five thousand that should be over the threshold and that should take it to zero boom okay so just to get an idea so when you see this graph it it says you know it caps out here but really you're not going to get that full credit at the AGI cap that's when it goes basically to zero you don't get anything if I was to graph this let's do ahead and insert the graph to get a pictorial representation because pictures I like pictures that's how I understand stuff so we got as the income goes up the amount of the credit goes up it caps off at that six nine three five around the twenty thousand and then it goes back down again so there we have it and so then I can I can compare that to what's on our 1040 instructions similar process except the instructions are you know have a lot more plot points right so if we had three or more three or more over here then as our income goes up then the amount of the credit goes up goes up goes up we're over here three or more incomes going up the credit goes up and then we're still going up over twelve thousand of income and then it's going to cap out at that six nine so it's still going up and then it caps out at six nine three five which is around the fifteen thousand four hundred and then it stays there for some time stays there for some time six nine three five until you get to twenty thousand two hundred about and then it starts going back down so if I look at our graph here there's the twenty thousand it's maxed out twenty five thousand it should be at five nine oh four so twenty five twenty five twenty five thousand twenty five thousand it's at the five nine oh four and then if I go down to the thirty thousand four eight five one thirty thousand thirty thousand is over here thirty thousand four eight five one and so on so I think I got those plot points hopefully mostly right so you can get an idea of the visual chart here all right so so that's the general idea now if I added let's go back to the twenty thousand where it's maxed out let's go back to the twenty thousand so it's maxed out twenty thousand credit maxed out at the six nine three five and let's add another kid why not why not at this point no I don't even know these kids are already driving me crazy one more is not gonna hurt all right so now we got four kids still head of household and four kids over here it's just ridiculous a madhouse only earning twenty thousand so I barely got you know the money to hold on to these kids but I'm still at the six nine three five because you don't get any more benefit from the EIC above that threshold now now if now if they were married like if I if I go to married the threshold will change so you can imagine another curve but it's not exactly doubling everything because you still have the maximum at the six nine three five and you're only having it a maximum agi so you can imagine this whole bell curve basically kind of or whatever whatever you want this curve basically shifting to the right would be kind of kind of the idea so that so that the maximum income level you'd get would be here instead of here but the still you have the max here so you can imagine the situation that if you had two people that got married and let's say they had like like one has two kids and one has one kid or something like that then they could be maximizing the credit of three thousand seven thirty three and six thousand one sixty four between the two of them and if they got married then they would have like three kids which would bring the maximum credit up to to here but it but you'd probably end up in a worse or situation even then even though you're going up to another tier level on the married level because of the because of the income thresholds but but notice if you had like one had two kids six one six four plus three seven three three and you're maxing it out that would be at the nine thousand nine thousand eight ninety seven if you're maximizing these two out and then if you were married and you got three kids then it would be at the six nine three five but it gets even gets worse if for example you had you had two people head of household that were maximizing the six thousand one sixty four times two six one six four times two and then you get married you're losing the benefit from the earned income tax credit of one kid all together right because you don't get any of that credit and then if you had two people that have three or more kids right if they had three kids let's say they had more you know let's say they both had three kids you could just say okay well if they get married do they get a benefit for six kids now no it's still capped at three kids so then you could see that would be a big disincentive you would think on the married side of things so let's just see let's just kind of get an idea of that if I was to say okay there's three four kids three kids doesn't matter for the single filer so let's say we had let's write it down here we've got head of household head of household three or more or more kids and we're gonna say then the income is 20,000 and we said the earned income credit is gonna be six nine three five six nine three five is that what we said it was yeah and then we said that the refund according to this calculation just the total refund for this example because that includes the child tax credit one is nine five six zero so nine five six nine five six zero okay and then if I multiply that times two I imagined two people filing head of household their income total would be 20,000 earned income tax credit between the two of them filing separately 13 870 and their refund between the two of them would be 19 120 so now what if they were married married we know the income would go up doubling it to 40 what happens to the earn income credit and the refund so let's do that let's go back on over and imagine we had two people that are in this scenario with three or more kids and whatnot and then they got married and so now we're gonna have six kids I got four here but it doesn't matter after three anyway so let's add six kids married couple all right so hopefully I got it all correct here so now we got married filing status is married filing joint you got you got Mrs. and Mr. and Mrs. and Mr. Anderson now we have to have a whole nother statement for our dependents over here because there's too many to fit on the lines they provided but we got one two three four five six kids now six kids and we're gonna say okay then 40,000 of income because we had two people that had 20,000 so they were maximizing their their their benefit before from the earned income tax credit at 6935 and the standard deduction doubles like you would normally think you know something would double if married the tax rates are adjusted for married but the credit here is now calculating at the 4036 for the earned income tax credit so 4036 4036 now remember this the maximum tax credit was 6935 that they were both getting before when they had three or more kids but had 20,000 of income because the 40,000 income they did the incomes don't double right so you can imagine this curve kind of shifting to the right but it doesn't like double so they're actually getting less than the maximum credit even though they got six kids now and the 40,000 of income married which as opposed to 20 and 20 before and so that comes out to 9661 so 9661 so you can see again you could come up with some substantial differences between two people filing 40,000 income between the two of them 2020 each and the earned income tax credit you know could have a significant difference between if they got if they got married and it's kind of a sad situation that the the allocation of the kids and whatnot I mean that could be a significant difference on the income could have some influence on you know the whole decision-making process but it is what it is so you want to be so you want to be aware of like if you're in that kind of situation then you got to think that there's gonna be tax you know the tax consequences could be kind of significant and you want to make sure you're kind of mapping them out so that so it's not like a shock if you get married and you're like hey wait a second this came when it is a lot less than we would have got as two separate head of household filers and again on the higher income side of things if you don't have those refundable credits usually getting married is a benefit it's not disincentivized by the tax code because because the standard deduction actually doubles if you got married which usually the incomes don't exactly double because if on the upper income side of things because usually one person possibly has more income than the other because they're splitting up the house and whatnot and then on page number two the tax rates usually are reflected as you would kind of expect if you had twice as much income so that it doesn't disincentivize a marriage situation but for some reason these well it's hard to figure all this stuff out but the refundable tax credits kind of create weird incentives so that is that also remember of course that that the other income such as Schedule C income instead of W2 income would also be earned income and and have a similar function of it increasing and decreasing according to the curve as Schedule C income goes up and down business income and other income that's that's more passive income like investment income does not have an effect on that curve of income and if there's too much investment income you can actually lose the earned income tax credit because if you had a significant amount of interest income and dividend income that would indicate you got a significant amount of money in the checking account or and or in the in investments so you would think you wouldn't need the earned income credit in that case