 Income tax 2022-2023 earned income tax credit the EIC no 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 we have the single file or Mr. Anderson living in Beverly Hills 90210 100,000 W2 income which is way over the threshold to get the earned income tax credit but that's just where we have been starting so we'll start there and then we've got the 12,950 standard deduction being taken that gets us to the 87,050 taxable income page number two then 14774 is the tax being calculated we're imagining 15,000 withheld for a refund of the 226. Now we want to focus in on the earned income credit particularly related to people that have no children. Now note when you think about the earned income tax credit you have to have some income in order to get it but then it caps out at some income level and goes back down and you can think about that threshold with regards to these three or four categories no children one child two child three or more children and think about what that curve will look like. So for example we're going to focus here on zero children which means the maximum credit at that level is only 560 as opposed to three or more children where it's 6,935 and the maximum AGI is 16,480 but that max really is when the credit goes below to zero what we want to know is where where is the max AGI that I can get to in order to get the full biggest credit of the 560 if you're married filing joint the max amount is 22,610 so let's see if we can 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 get an idea of this obviously the income is way too high for us to be able to claim the earned income tax credit at this level let's bring it down to that to that 16 for let's let's bring it down to 16 480 just to get an idea of this curve and we're going to go okay bring it back on over still no earned income tax credit because we're above the threshold but once I bring it down a little bit below that let's bring it down to 16000 now we have a little bit of the earned income tax credit being calculated so notice you get when they use these thresholds usually the irs likes these end thresholds because it kind of makes them look better it's like you get you get this earned income tax credit up until your income is 16 480 it's like yeah but you're not getting the the big credit of 560 at that level it's almost totally phased out to $35 at that level and you can take a look at the worksheet to kind of consider to to understand the calculations for the credit but the general idea that you want to have conceptually is you know this credit is going to be a lower income threshold credit it goes up with earned income up to a certain threshold and then basically goes back down again and it's also going to be dependent on the number of children now another thing that could come up from time to time is if you had non-taxable combat pay so if you have combat pay then the benefit usually would be well it's not going to be a taxable item but you could have some situations where you're like well I want it to be taxable or at least be included for the calculation of the earned income tax credit so that's usually a q designation on the w2 form so for example if I have the same 16 000 the 10 000 of combat pay non-taxable if I go back on over we still have the 16 000 w2 income it's not included in the other other 10 000 because it's not taxable and it's not doing any adjustment to the 35 for the earned income credit but you might say hey look in this case I would like you to add that to the calculation of the earned income tax credit so elect to to include non-taxable combat pay so if I do that then it removed the credit entirely let's bring the combat pay up down a little bit uh let's say let's say it was only like uh $300 and so if I go back on over now it brought it down to $12 so if I was under the threshold then it might be a situation where the combat pay would bring it up so for example if I take the combat pay off and let's start let's say we had basically just 1000 of income 1000 of income the worksheet is saying we only we got $75 of the earned income tax credit according to the calculation just a thousand dollars of income combat pay not being included and in that case you might say okay look I'd like the combat pay let's say it was let's say it was 5000 of combat pay and I would like you to include that in the calculation of the earned income tax credit then you would have a benefit of the combat pay on the earned income tax credit so that doesn't happen all the time but you get the best of both worlds possibly in that particular situation so you want to have an idea of it you're still for federal income tax purposes getting taxed on the 1000 but you might be able to include that combat pay in the calculation of say earned income tax credit all right let's go back to the 1000 here and just kind of map this out and see if it makes sense in relation to the tables so if I say we have 1000 dollars we're going to say 1000 dollars here obviously that's below the threshold to to pay oh any taxes you wouldn't even have to file but if you did file you might want to still do it because you get like possibly 75 dollars is what the software is calculating for the for the earned income tax credit so let's say if I map this out on excel here just for the fun of it we're going to say that the wages is 1000 and we had 78 78 dollars right 78 dollars for 1000 and let's go back on over and say okay let's bring it up to 2000 if I go to 2000 we're at our 155 and I'm basically making a little table here so 2000 155 I'm kind of mirroring the tables that we see here in the form 1040 instructions so if you go to the 1040 instructions you could find these tables but these tables can be a little bit complicated to look at so if we map it out we could do it like maybe a little bit of a graph and kind of see the curve related to what zero children and then our income levels right so if I go back on over and say okay let's do this again and say we bring it up to 3000 3000 boom we're at 231 3000 is at 231 231 going back on over then let's go let's jump it up to 5000 we'll skip up to 5000 and now it's at 384 so we'll say 5000 384 and let's go 7000 7000 7000 brings us up to 537 so 537 let's go to 9000 9000 and that brings us up to 560 so we'll say all right 9000 560 and that's getting close to our threshold here because you'll recall that the max was the 560 right so going up from this level of income is going to actually bring it back it's going to bring it back down at some point so nine let's go to 11000 11000 brings it to 417 so 1100417 and let's go back on over and say 13000 and that's going to be 264 so we'll go okay 13264 and then let's pull this over here we're going to say okay 1314 15000 it goes up to 164 so we're almost there 15000 it's going to say 111 111 and then 16000 we're getting close to it being phased out completely $35 we saw before and 35 and then if I go to 1618000 it's going to be down to zero so 18000 down to zero so there's the wages here's the credit for no children and if we map that out with like a chart let's go ahead and put a graph together on that and say I'm going to insert let's see what the recommended graph types are this one looks pretty good or we could do it let's do this this here and we'll get rid of the name and so we get something like that right we get a curve that would be obviously as your income as you're as they've got the income over here as your income is going up then the amount of the credit that you're getting is going to go up it caps out and then it goes back down it caps out at that 560 is the general idea so what you really want to have an idea is is the what what's going to be the shape of this curve at each of these kind of levels and so if I if I go back on over and say the credit is gone if I change it to married then we can say let's go to married and before I do that by the way let's just take a look that curve is similar to this table so right so we've got this table here which you can find on the form 1040 you could do the same thing you can say okay here's my income levels here's zero how you know where to where am I going to be out if I'm within these earned income levels so you can see the earned income is going up up up we want to see where it maximizes at that so it's still going up up up up up and then it's going to maximize somewhere here at that 560 so around 7300 up to so you can see here when we got to the 560 we were at 9000 so 7300 to it's still there at that cap at that 560 till like 9000 and then there's the 9150 and then it goes back down again so if we check another one of our numbers here 15000 15000 is going to be down here so we've got 15000 111 right so 111 coming from the table so that makes sense so we could take that whole table and graph it out and look at this curve although that would you have to get the data from the table so this is just a few a few plot points on on it just to get an idea okay so then if we if we then change it to married it doesn't quite double everything like you might expect but but the thresholds go up a little bit so now we're married filing joint we're at the 18000 and we still have no income at that level because it's because now the standard deduction did double to 259 and so we're thinking refundable credits and we're still at the refundable credit level now because we have a different set of tables over here so if I was to look at the tables now the maximum before we phases out completely is that 22,000 610 22,000 610 so if this was to keep on going up on the W2 wages you can go to 22,000 before it goes away entirely but so you can see and you can plot the same kind of graph right and if you were looking at this this table same table this is the form 1040 instructions zero here but now you're looking at married filing joint and you'd be looking up the same kind of items so next time we'll do a similar thing for for one child two child and three child so really you have you know like a you've got like eight graphs kind of in your that you'd have to kind of think about in your mind right what zero children married or single one child child married or single has a whole different graph two children married or single three or more children married or single so that's the general idea and then the question is well what counts as earned income as well so note that passive income doesn't generally count as earned income so if I was to have you know income from interest or dividends or something that's not going to typically count in terms of earned income for affecting the credit however if I have a lot of investment income like over like 10,000 I think it is which is kind of unusual if you were going to be calculating the earned income tax credit then you you might not get the credit because the idea would then would be well if you got that much dividend and interest income you have you must have a lot of money in the bank or in investments which means it's kind of weird that you would be calculating the earned income credit you shouldn't really need it you would think in that case so that's that general idea as well if you had business income then that would count as well so if you didn't have w2 income if we take the w2 income out and you had other business income and this is where the scammers often come in because with the business income you can create a schedule c and you can say okay this person doesn't have any income and the scammer will say okay I'm just going to maximize out the income to get and I'll just add a schedule c right so those still go okay I got to make around 9,000 income to to get the credit because I have to have some income so let's just say that this was 20,000 minus 11,000 advertising 11,000 and so now we've got this and I'm just doing this quickly just to get an idea but now we got the schedule c income the net income is 9,000 which ultimately pulls into page one of the form 10 40 of 9,000 so now you've got your income and if I go to page two and I was looking at yeah there's them there so now you've got your earned income tax credit right so that's and the reason scammers do that is because is because the w2 income there's verification on the IRS's side if they had w2 income so they can't really do that so you can imagine them trying to use some other income like schedule c income what you would think would be fairly common because the IRS can't double check that so easy and so you want to be careful of you know the scammy tax preparers because because obviously you could be audited to be trying to take advantage of the earned income tax credit by actually trying to increase people's earnings so that they can pick up this credit which could be substantial not so much for zero dependence but once you get to three or more dependence it starts to be quite substantial as we as we could see and we'll take a look at some more of those tables in future presentations