 Hello and welcome to this session in which we will discuss the earned income credit. Earned income credit, also known as the EIC, which stands for earned income credit, is a refundable tax credit. And we spoke about refundable tax credit in the prior session. What does that mean? It's an important concept. It means that you can get money in addition to wiping out your taxes. So if you have a tax credit and it's non-refundable, it will help you reduce your taxes. It might help you reduce your taxes down to zero if it's a non-refundable. If it's a refundable credit, it will reduce your taxes to zero and anything in excess, the government will send you a check. So it's a great way to get some money from the government. Now, it's designed to benefit low to moderate income working individuals. Remember what we talked about in the prior session, we said credits are designed to encourage certain behaviors. So if the government wants you to work, they want to encourage you to work and you don't make a lot of money, they would say, okay, go ahead and work. You work a little and guess what? We're going to give you some help through that credit. So they want to encourage you to work. It was part of the welfare reform system. So they want people, they want to encourage people to work, especially those with children. Because if you have children, you're going to see the amount substantially higher. Again, the purpose is to help you to work. Why do you need to understand the purpose? You need to understand the purpose because you're going to see how the tax credit is designed. It's designed in a way that the more money you make, the more you get up to a point. So that's why it's encouraging and supporting you to work and make more money. Before we proceed any further, I have a public announcement about my company, Farhat Lectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. As I mentioned, it's a refundable credit. It's based on your earned income, so how much money you make, and adjusted gross income, AGI. Also, it's based on your filing status and the number of qualifying children. We're going to look at the qualification specifically, but the purpose of this is to give you an idea that it's based on several factors. Again, the credit increases with the earned income until it reaches a maximum amount, and that maximum amount that changes every year then gradually decreases as the income surpasses this amount and it keeps decreasing until you are out of that zone. You no longer qualify. Again, as a refundable credit, the amount exceeds the tax liability. If the amount exceeds the tax liability, you would receive a refund, which is a great thing. How to qualify for the earned income credit? There are certain rules you have to qualify. The first one is obvious. You have to have earned income. Earned income. What does that mean? You have to have wages, salaries, steps, self-employment income, other taxable income, some form of income like unemployment benefit or social security does not count as earned income. Now, also what counts as earned income is combat wages. If you receive combat wages, although they're not taxable, they are earned income. You have to meet income limits. For example, you cannot be making too much money and that limit will change from year to year. Well, we're going to look at a year as an example, but bear in mind each year those limits will change because if you're making too much money, you don't need the government help. Filing status. Well, guess what? Taxpayer must file their taxes using one of the following. Single, head of a household qualifying with or with a word with a dependent child or married filing jointly. Notice, married filing separately, you don't qualify for earned income credit. You have to have social security for, of course, for you, the individual filing, as well as the qualifying child or children that they are, that they are claiming on the EIC. Now, to claim EIC with children, earned income credit with children, taxpayer must meet certain criteria regarding the age, relationship, presidency and joint return status. Simply put, the same as the dependent qualification. If you're not sure, see the dependent qualification. Now you, you may not have a child, but you're going to see the credit is very small, but it's designed specifically to support families with children. That's the whole purpose of the credit. Now, investment income. Well, you can't make too much money. In other words, if you have too much money from investment income, then you don't qualify. Why? Well, the limit just for the sake of illustration for 2020 is around 10,300. That's a lot of investment income by itself. I believe it's a lot of investment income. So simply put, if your investment income reaches above a certain amount. Now, what is investment income? Because we have, we talked about earned income. Earned income is the income that you work for. You earn it through wages, through salaries, through your own labor, through your own sweat. Investment income is different. Investment income, we're talking about stocks. We're talking about bonds. We're talking about real estate investments. We're talking about gold, cryptocurrencies. You are making investment with your money. That's OK if you have some investments. As long as the investment income don't exceed 10,300. I believe investment income of 10,300 is a lot. And it changes every year. But the point is you cannot have too much investments. What does that mean? It means you don't need our government. You have enough investment. You can do, you can live off that. You have to be US citizen or resident alien. So the taxpayer must be US citizen or tax alien for the entire tax year. Again, the credit also available for people with no children, individual with no children. Available for taxpayer age 25 through 64. You have to be under 65. And you cannot be claimed as a dependent. Now, the amount is a small amount. Now, bear in mind, you might be looking at your textbook at this point, you might. And you might be saying, no, that's not correct. The age is different. Yes, they dropped the age in the year 2021, but they pushed it back for single individual with no children to 25. So now we're going to have to go with 25 unless the law changes. If you're looking at this recording and the law changes, then you'll have to make this adjustment. Let's take a look at some figures just to give you an idea. And these are for year 2022. So if you're looking at this recording 2023, if you're looking at this recording, 2028, the concept should be the same. However, these figure will change. Again, let's define earned income, wages, salary, steps, other taxable income. It has to be taxable, not earning from self-employment. And employee pay is earned income because if it's taxable and most likely it's taxable if you work, then you earned it. How does it work? Well, if you have no children, zero children, here's what's gonna happen. And you are filing other than married. So you're filing single, head of a household filer. You are not filing married and head of household including qualify with a word, with a word. Here's what's gonna happen. Max AGI, once you go above 16,480, you lose everything. In other words, you can no longer qualify. So if you're single, no child, well, once you make more than 16,480, you're no longer qualified. Now if you're married, filing generally, it's a little bit higher, 22,610. Now anyway, the maximum credit you will earn is 560. So if you're closer toward the peak, you get 560, the maximum credit. This is the maximum earned income credit. Now if you have one child, notice you could make up to 43,492. Okay, this is the max AGI. So you will be in good shape. So you notice you could make more than 16,480. You could make up to this amount and keep earning earned income credit. But once you exceed that, you would lose it. The max AGI is close to 50,049,622. Again, these numbers will change. Notice with two children, single 49,399, married 55,529. And this is the maximum amount of credit. Don't worry, we would look at few examples to illustrate what we are talking about here and how to look up this earned income credit. What is your earned income credit? Let's look at few examples. George, single, 22 years old and has no qualifying children. His income consists of 10,000 in wages. Does George qualify? Well, let's take a look. George will be here, no children. His income is below 16,480. So he should qualify and the reason is no. Why? Because age 22. Remember, you have to be 25 to 64. You cannot exceed 64. So it's an age requirement thing. Maria, 28, so there should be no age problem here. Maintain a household for a dependent 13-year-old son who's eligible for a head of household tax rate. So she's filing head of household. Her income consists of 15,000 of salaries, 150 of taxable interests. Well, so if we combine them, 15,200. So we're looking at a person with one child and we said 15,200. So 15,200 is below 43,492. So Maria qualifies and there's no age issue. Now, how do we figure out her return, her not return, her EIC? We're gonna go to a table that's provided by the IRS. And this is again for the year 2022. This could change. So here's what's gonna happen. We're gonna go and look up her amount. It should be right here, 15,200 to 15,250. So if the amount you are looking up to from the worksheet is this much, which is the worksheet means your AGI, and single head of household qualify with a word. She's a head of a household with one child and we're gonna go down and we're gonna see that Maria's credit is 3,733. So she would receive a tax credit of 3,733. Now, if Maria has a tax bill, let's assume Maria has a tax bill of 5,000. Well, guess what? She can reduce her tax bill by 3,733 in what you will end up paying overall, 3733, 1,267. That's how much you'll have to pay to the US government. Let's assume her tax bill is only $500. So let's see. She got a credit of 3,733, minus 500. She's gonna get a check now, 3,233. She will get a check because remember, this is a refundable credit. Refundable means they will give you money if you eliminate all your taxes. So she eliminated the $500 and what's left is refundable to her. Not all credits work this way. Most credits are non-refundable, most. Some are, EIC is a prime example. That is a refundable credit. So now in our example, Maria would qualify and I showed you how to compute the amount. So it's easy to compute the amount once you go to the table. Homer and Marsh, both age 30 are married, final and general return. No dependence. Their combined income, 13,500 and a salary of 300 of taxable income. Notice I kept mentioning interest here. Maria doesn't, it doesn't matter because remember the interest income, which is the investment income you could have up to 10,300 of those. Same thing for Homer and Marsh. The interest income is not an issue, the investment income. But let's look at their combined income, 30,800 with no dependent. So let's go back to the table. We said we're looking now at 30,800. No children. Guess what? Married, final and general, their way above they don't qualify. If they had a child, if they had a child, they would qualify. They would qualify, we'll go to the table and look up 30,800 with one child. If they obviously, they have two children, they would qualify because the limit is 55,000. If they have three, they would qualify as well. But this is how you would look at earned income credit. This is how you would compute it. What should you do now? Go to Farhat Lectures and look at additional resources that's gonna help you complete this, understand this topic, work multiple choice through false, good luck, study hard and of course, stay safe.