How To Calculate and Report The Earned Income Tax Credit (EITC)

How To Calculate and Report The Earned Income Tax Credit (EITC)

Welcome to tax teach my name’s Sean I’m A certified public accountant Specializing in taxation today I want to Go over how to calculate the Earned Income Tax Credit as well as report the Credit on your tax return Let’s get right into it before we get Into looking at the Forum and the Calculation itself let’s give the Background of the facts for this example We have taxpayers Jan John Doe they’re Married filing jointly they have two Children Joe who’s eight Ben who’s five We’re gonna have W-2 income of fifty Thousand dollars interest income of a Hundred dollars and we’re going to Assume that all family members have Valid Social Security numbers by the Time this tax return is filed as well as All family members being a U.S resident Or citizens for the full year I’ve been Living in the US for the full year that Is the facts behind this example now Let’s get into how the form will be Prepared All right so here is the form 1040 most Of it’s blank I just want to go over the EIC the Earned Income Tax Credit Um so I didn’t fully complete the form But you can see here line 27 that is Where you will place the Earned Income Tax Credit note that if you have Qualifying children so in this example We have two we are going to have to fill

Out schedule EIC but if you’re single Trying to get this credit you don’t have To fill out schedule EIC In the you can see here the first part Of the 1040 we have the 50 000 of the W-2 income the hundred dollars in the Interest income and then the calculation Further down the form so now let’s look At the schedule EIC because this Taxpayer example we have Two children Here’s the schedule EIC we have the Taxpayer and then also the children down Here Jill and Ben In our example Jill is eight Ben is Five and these are considered qualifying Children now you might be asking what is Considered a qualifying children A qualifying child and if you go down to The second page of this schedule There is a qualifying child Diagram here that lets you know what a Qualifying child is it can be a son Daughter stepchild foster child brother Sister step brother all these examples Here They have to be under the age of 19 at The end of the tax year and younger than You or your spouse or they have to be Under the age of 24 at the end of the Tax year a student and younger than you Or your spouse They are permanently disabled and Totally disabled they can be any age

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So these are the qualifying children Parameters Let’s go back up to the beginning of This schedule schedule EI C in our Example we have Jill and Ben who are Both considered qualifying children Because they are younger than their Parents obviously and uh they’re eight And five so they’re under 19. You put the children’s name here and Child one time you got Jill and Ben you Put their social security numbers on Line two three you put the year in which They are born 14 and 17 for these children 4A was a child under the age of 24 Mark Yes for both both children were and it Tells us to go to line five here we have Daughter for Jill relationship and then We have Sun for Ben How many years do the children live with You in the United States or excuse me How many months we have 12 and 12. And that is the schedule EIC pretty Pretty simple they want to know they Just want to know the information of Your qualifying children for the Schedule now that we have the Information for the qualifying children Now I’m going to go to The Forum 1040 Instructions where we’ll actually Calculate your earned income tax credit So let’s take a look at that

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Here we are we’re at the form 1040 Instructions page 38 for 2022 tax year And this is where we’ll calculate our Earned Income Tax Credit Let’s start with step one for all filers If in 2022 let’s go to we have two Children they have valid Social Security Numbers And we have to look at line 11 of Reform 1040. if it’s less than 49 000 if you’re Single or 55 000 if you’re married Filing jointly is the first question Because if we make over fifty five Thousand dollars in 555 529 we can’t Take the credit If you have two children If we go back to our form 1040 here our Line 11 your adjusted gross income is Fifty thousand one hundred dollars which Is the combination of the fifty thousand Dollars we made under W-2 ages and a Hundred dollars we made on interest Income So if we go and going back to the Example our taxpayer makes under 55 000 So we would Mark yes here and continue On Do you and your spouse if filing Julia Have a social security number we do so We keep going Did we file form two five five or twenty Five fifty five No we didn’t because this form relates To foreign earned income and these

Taxpayers were in the U.S for the tax Year So we don’t know then the next question Four is were you or your spouse a Non-resident alien for any part of the Year we’re going to say no and go to Step two investment income If you make over a certain amount of Investment income you cannot take the Earned Income Tax Credit in our example If you look at line To be here we have a hundred dollars in Interest income which is considered Investment income you would put 100 here With a total of 100 investment income Next we go to two is your investment Income more than ten thousand three Hundred dollars No it is not right we only have a Hundred dollars of investment income you Would skip question three and go to Question four Which is right here Do any of the following apply for 2022 Are you filing schedule schedule e no This relates to rental income Are you reporting income from your from Uh personal property no in our example We did not have this are you filing form 8814 no we’re not Do you have any income loss from passive Activity No so we’re going to go to skip three Step three

Right now we’re on step three Determining your qualifying child we Went over this when we went over Schedule EIC so I’m going to go to in Depth here just know that this Calculation is just determining if you Have qualifying children for the year We’ll start with part one of this step If you have at least one child who meets The conditions To be your qualifying child in this case Both Ben and Jill as discussed earlier Both would be considered qualifying Children so we Mark yes here Second part of this step is are you Filing a joint return for 2022 in our Example yes both Jane and John are Filing a joint return so we can Mark yes Here You skip the rest of the questions in This step and we skip step four all Together and next we’ll go to step five So let’s go down to step five right here And this is where we will determine our Earned income All right here’s step five the earned Income Are you filing schedule SE this is Relates to self-employment income for Example no with this these taxpayers Don’t have any self-employment income We go to question one enter the amount Of form 1040 line 1z I go back to our 1040 here and go to line one Z you can

See we have 50 000. If you go back to the instructions put 50 000 here follow these questions 50 000 here We go next to Four And none And so our total earned income is 50 000 Which is expected that is the amount of W-2 wages for these taxpayers Question do you hear were you Self-employed no so we’d continue down To three if you have in our example we Have two qualifying children who have Valid Social Security numbers And earn income less than since we were Married filing jointly we do yes we do Have earned income less than 55 529 so we select yes here and the next Step is to go to step six and this is Where we will figure out what our earned Income tax credit is for these taxpayers Step six the last step is let’s figure Out how to figure the credit here There’s two options one you can go with Have the IRS calculate your credit or You can go to the worksheet and Calculate yourself In this tutorial I’m going to go over How to calculate it yourself just note That if you want to have the IRS figured Out you would check it here and go down And you’ll see the credit figured by the IRS enter EIC on the dotted line next to

Line 27. And that if you hear this is line 27 You’d enter EIC in the dotted line and Then the IRS would calculate it for you But in our example we want to calculate This ourselves so we’ll go to schedule a As mentioned Let’s scroll down schedule a is on page 43 of the 1040 instructions for 2022. Enter the earned income we have the 50 000 right from our W-2 earned wages And the second step is to look up the Amount of yeah EIC from the table Scroll down with this 50 000 number Right go down to the table mentioned Here is the EIC table you can see in the First Column this is the amount of Earned income and then the other Amounts relates to what’s filing status You are and how many qualifying children There is so we’re looking to look up 50 000 on this column and then we’ll look At what a Mary falling jointly to Qualifying children that will be the EIC That we pull so we’ll scroll down a Couple Pages until we get to that 50 000 Number that we as our earned income Number we’ll go down keep going And right here we got 50 000 we’ll keep Going across the table until we get to Two that’s our qualifying children that We have we have two so we have 1159 We’ll go Back to

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The worksheet a with that 1159 number Keep scrolling until we get there right Here so we’ll enter that [Music] 1159 number Three we next have to enter the amount From line 11 of our 1040. so let’s go Back to the 1040. line 11 is 50 100 Which is our W2 and our interest income Let’s go back to the instructions 50 100 Are the amounts on line three and one The same no they’re not the same right We have a slight difference because of That interest income So let’s go to line five If you have One or more qualifying children valid Social Security is it less than Is the amount less than Twenty six thousand three hundred Different following Julie no it’s not Right it’s fifty thousand one hundred So now we have to look up online three In Mountain line three which is a fifty Fifty thousand one hundred and go back To that table that we are looking at and Recalculate the EIC So we’ll go back to that table Right Here instead of using that 50 000 number We’re going to use that 50 100 number We’ll go across the table And we have 1138 A slight difference between the amount

That we calculated Originally Let’s go back to the worksheet And we’ll have The 1138 amount [Music] So If we will look at this and see all Right so the amount of credit 1138 okay Demands on line five versus line two And then we have to enter the smaller The amount on line six Is so the smaller amount would be 1138 dollars in our example Foreign This is our earned income tax credit for This taxpayer to remind everyone of the Example we had married filing jointly Taxpayers They had two children qualifying Children their earned income was 50 000 But they also had some interest income Of 100 so their adjusted gross income Was fifty thousand one hundred dollars And our total Earned Income Tax Credit Comes out to be 1138 dollars for this taxpayer go back To our form 1040 here and go to the line 27. And we calculated their Earned Income Tax Credit of 1 138 And remember for this taxpayer we’ll Have to include schedule EIC with a form

1040 tax return And that is the calculation of the Earned Income Tax Credit As well as how you report it on your Individual income tax return This is a very basic example but I hope Going through the instructions and how We calculate the credit is helpful for You when it’s time for you to file your Tax return this year you have that basic Background of how you calculate the tax Credit thanks for watching the video I Hope you found the video helpful and Informative if you enjoyed the video hit The like button it lets me know that I Produced a good video and if you want to Watch content like this in the future Hit subscribe button it’s free and it Keeps you up to date on items I post in The future Thanks for watching the video and I’ll See you all next video [Music]

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