 Income Tax 2021-2022 Software Example Earned Income Tax Credit, the EIC, with two qualifying children. Get ready to get refunds to the max, diving into Income Tax 2021-2022. Assert tax software. You don't need tax software to follow along, but you might want to have access to the forms, which you can find on the IRS website, irs.gov, irs.gov. Starting point this time, single filer Adam Smith, living in Beverly Hills, 90210. Two dependents, both of them being qualifying children for the purposes of our focus here, the Earned Income Tax Credit. In prior presentations, we looked at situations that had zero qualifying children and then one qualifying children. Now we're at two qualifying, and then in a future presentation, we'll look at three and above the benefits that are received with regards to the Earned Income Tax Credit, in essence capping out at the three. So we'll take a look at that next time. So down below, we've got the wages starting at the $19,549 unusual number. We'll explain it shortly. We've got the $12,550 on the standard deduction. We've got the $6,999 for the taxable income, and then on page two, tax calculated at the $6,98. And then the Earned Income Tax Credit is at the $5,980. We also have the refundable child tax credit. Both of these have a refundable portion to them if aren't all refundable. And so they kind of co-mingle together because a major factor of both of them are involved in the dependents that are going to be involved in the qualifying child for those two types of credits. But we're focused up here on the Earned Income Tax Credit at this point. Note that that's a substantial amount of credits. The tax was only $698. So basically these refundable credits are acting not as a means of getting a refund, even though it's kind of called a refund or it is called a refund down here. But really it's a benefit program at this point in time because it's bringing the liability down below zero resulting in payments after that point in time. So the reason we're focusing on the income level here at the $549 is because many times you'll have questions to say do I qualify for the Earned Income Tax Credit and how high does my income go for me to be able to benefit from it. If you look at that on the IRS website, you'll see a table like this. Most likely if you have two then qualifying children. If you're not married basically $47,915, above that then you lose the credit entirely. If married it goes up to $53,865. We'll look at both of those caps in this presentation. Note that it's not double when you get to married so we'll talk about that later. But what we want to also know is where does it cap out? The income level goes up, your credit goes up and then it caps off. If you have two qualifying children at $5,980 and then as your income goes up it drops off again until you go past these upper thresholds at which point you don't get any benefit. So where does it cap off at? That's where we're starting right here. So it caps off. This is the upper limit of it capping off. You can find that by going to the instructions for the Form 1040 and look at the tables here. And so you could get the lower region for it to be at the cap and we're looking at the table for two individual single and then we'll take a look at married later. So we're at two qualifying children for single. We've got the $14,950 at the lower end and then your income could go as high as the $19,550 if you're a non-married filer to be receiving the maximum credit which is at that $3,618. So we're currently at the maximum end here, the $19,450 to be maximizing the credit at that $5,980. We can go as low as on the lower side going back down to the $14,950 and still be maximizing the credit. So if we went down to then on the income $14,950 then we would still be getting the maximum credit for two qualifying children which is the $5,980. Now if we go below that then it starts to go back down. So if I was to go, okay, what if I went below that to $13,000 then the credit is going down because it's trying to incentivize people to work. That's kind of the concept of it. So if it went down to $10,000 then it's going to go down. If it went down to $9,000 or let's go $8,000 then the credit calculation is going down. It went away at the $8,000. So if I go back up to that was $80,000 I was going to say, wait a second that doesn't seem like a steep drop off. And then if I go to $4,000, there it is. If I go down to $2,000, here's the credit going down. And if I go down to let's say just like $100 then I'm getting close to removing the credit entirely. You can see that of course mirroring in the table here as your income thresholds change. Now if I bring it back up to the max, the lower threshold max at the $14,950. Let's go back up to the $14,950, $14,950. Then I'm back up to the maximum of the $5,980 maximum for two qualifying children that is. I can bring that income threshold up. It plateaus off at the max until I get to $19,549. Let's say $19,549, $19,549. And there we're still at the max at the $5,980. If I go $1 over that $19,550, then it starts to go back down again. So then it'll start to go back down. If I go above this threshold, we've reached the cap, $22,000 in wages, $22,000 it's going down. If I go up to $27,000, then it's going down. And if I go up to $33,000, let's say $33,000, it's going down. If I go to $38,000, the credit's going down. If I go then to $43,000, let's say $43,000, it's going down. If I go to $46,000, it's going down. And then if I go above the cap, the upper threshold to remove the credit entirely, which is around $48,000, then we've lost the credit entirely. Okay, so let's go back and let's say my income was relatively low at $5,000, which is below the maximization of the cap. But my 2019 income was higher, I can possibly elect to take the 2019 income if it's greater. So I could say, okay, what if my 2019 income was within the range of, let's just say it was like $19,000. So 2019, I'm going to elect to take 2019, $19,000, pulling that on over. I'm back up to the $5,980, and I'm using the 2019 income that's indicated here, even though my actual income is only $5,000, which would be below the threshold and I wouldn't be getting as much of a benefit. So you can go back to 2019, you can't go to 2020 for some reason. You got to go back to 2019, and you could check out the two to see if that would be a beneficial thing. The other thing that's kind of funny is the combat pay. So if you had a member of the military that had combat pay, let's say they earned $5,000, and then the combat pay was usually a W-2 you'll have in line 12A, it'll have a Q, which means it won't be in box one most likely because it's not going to be taxable, but you're going to, let's say the combat pay was like $9,000 here, then if I go back to my forms, the benefit of combat pay is that it's not included in my line one, therefore no taxes being applied on the combat pay, but I want to elect for it to be included for the EIC credit. So I'm going to go back on over and say elect included for the calculation of the EIC, then I can include it. So now I've got the combat pay that's included, which increases the amount of the credit. So you got to kind of keep that involved if you got members of the military in there so that you can maximize the benefit on the combat pay for them. Okay, let's take this back out and now let's say that they got married. So let's max this thing back out again. Let's say they were at the upper threshold for if they were single at the 19, 549. So this would be 19, 549, and that would be maxing out then over here. So we'd be maxing out the 5,980. Now if they got married, you can imagine they got married to someone, for example, that doesn't have a qualifying child, and if their income brings them over the threshold for married couples, which is 53, 865, then you would lose the credit entirely, right? The credit would be removed at that point. So let's say they got married and the second one, this isn't combat pages, this is just a second W2 wages of 34, 316. That would bring us above the 53, 865. And if we came back on over then on page two, then we don't have anything in the earned income tax credit because now we're over the threshold for married. So that you would think that would be like a non-benefit. You got to keep that in mind because that can be kind of a shocker because if they filed married filing separate, the one taxpayer you would think we saw was maximizing out at the 5,980. The other one would not be receiving any earned income tax credit benefit if they were filing single because they would be over the single threshold with no qualifying children to claim the credit, but still that's a significant, that could be around almost $6,000 difference between single and married. So again, it kind of seems like a disincentive on the marriage side in that case. What if they got married and one of them, one of the spouses had the two qualifying child and the other one had one qualifying child? That would mean that before they got married, if they were both single, one would be maxing out the credit at the 5,980 and the other would be maxing the credit at the 3,618. That would be a 9,598 between the two of them if filing single. And let's say they got married. Now there would be three qualifying children. So we could say, okay, so now let's add another dependent. And they both made then the 19,549, which is maxing out the credit for one qualifying child and two qualifying children. And then if they got married, we'll talk about three or more in a future presentation. But if they got married, now you've got the three dependents, which is the max of the dependents that would benefit the earned income credit. And then on page two, we've got the earned income credit, which is at the 3,862, which I'm relying on the software to calculate. But just to think about that, I mean if they were not married, then the one with the two qualifying children should have maxed out at the 1,980 and the one with one qualifying children should have maxed out at the 3,618 if they were filing separate. So there's a significant difference between the benefits, between filing separate or not. So that could be a significant change. Now one more, what if they were exactly the same? They were both basically maxing out the credit and with two children. They each had two children maxing out the credit with two children. Then you would think that they would be getting, both of them would be getting the earned income tax credit if not married at the 5,980. And then when they got married, then they would be combining together and they would still be maxing out at the 1,949. And there shouldn't be any more benefit, so I can add another dependent here, but it shouldn't have an impact on the earned income tax credit. We'll talk more about that later. So that would mean then you'd only have the same benefit between three or four. And so if I go back on over here, then again there's a significant difference if they were single and they maxed out with two qualifying children. It would be 5,980 plus 5,980 for two people that were single maxing out the earned income credit. That would be 11,960. And if they got married, they'd only get a benefit of the three child because the fourth one doesn't increase the earned income tax credit. And so again, you would end up with this situation. There's a significant difference between the single filers and the married filing joint. Okay, got it. We'll do the three of them next time. Let's bring it back down. And let's think about our maximizing of the curve if married and we have two dependents. So now we're the two dependents married. They're both qualifying for the earned income tax credit. If we have the upper max to maximize the credit, that's at the 25,499. So that's the upper threshold to max out. In that instance, if I go to page two, you can see we're at the 5,980 on the upper threshold. I can go as low on the income before my credit goes back down. I could go as low all the way back down to that 14,950 without lowering the credit. So I can go, my income can go back down to the 14,149.50 and say the credit is still at the maximum. If I go below that and say my income is now at 10,000, then of course the credit starts to go down. If I say the credit is at 5,000, then the or my income is at 5,000 credit goes down incomes at 2,000. And then the credit goes down. If I don't have any income, then the credit goes away. If I go back up to that lower threshold to maximize it back out. That's the 14,950 back up to the 14,950 of income credit back at that maximum amount of the 5,980. We can plateau there bringing our income all the way back up to the 25,499 I believe, 25,499. And there we were still at the max. But if I bring one more dollar into it, 25,5, that credit starts to go back down again. That credit went down. So didn't it? Yeah, it went down. So then if I keep on going up, let's say I go to 30,000 of income. Now the credit's going down. If I bring it up to 35,000, then the credit's going back down again. If I bring it up to 40,000, then the credit's going down. And if I bring it up to 45,000, then the credit's going down. And if I bring the income up to 50,000, then the credit's going down. And if I go above 54,000 about, then the credit is going entirely. So you can see again, if you had the two children, you've got the threshold, upper threshold 47,915. It doesn't like double if married. It just goes up to the 53,865. So that's the general concept with the two. So next time we'll go to three and above. So next time we'll go to three and above. In prior presentations we talked about with one and with zero.