You’ve probably seen the signs. They are put on the corners of major intersections every tax season by tax preparation companies. This year they say something like this:
- Get up to $3,359 with one child!
- Get up to $5,548 with two children!
- Get up to $6,242 with three children!
Or sometimes you will see the signs with an additional $1,000 per child:
- Get up to $4,359 with one child!
- Get up to $7,548 with two children!
- Get up to $9,242 with three children! King James, His Bible,... Best Price: $14.96 Buy New $19.95 (as of 11:35 EST - Details)
Or sometimes the signs will just read like this:
- Get back up to $9,339!!
(I have seen some signs with last year’s figures or simply the wrong figures.)
What do these numbers mean and why should we be concerned about them?
These numbers are referring to the maximum amount of (1) the Earned Income Tax Credit, or (2) the Earned Income Tax Credit plus the Additional Child Tax Credit, or (3) the Earned Income Tax Credit plus the Additional Child Tax Credit with four or more children that someone can get refunded to him by the government over and above any income taxes that were withheld from his paycheck.
What these signs never say is that these figures only apply if each child is a “qualifying” child and someone is single and his earned income is
- at least $9,850 but less than $18,150 (1 child)
- at least $13,850 but less than $18,150 (2 or more children)
or married and the household’s earned income is
- at least $9,850 but less than $23,650 (1 child)
- at least $13,850 but less than $23,650 (2 or more children)
War, Christianity, and... Best Price: $4.98 Buy New $9.95 (as of 11:10 EST - Details) If one has earned income outside of this range, then the amount of the Earned Income Tax Credit is reduced. Additionally, for single taxpayers, earned income and adjusted gross income must each be less than $14,820 (no children), $39,131 (1 child), $44,454 (2 children), or $47,747 (3 or more children). And for married taxpayers, earned income and adjusted gross income must each be less than $20,330 (no children), $44,651 (1 child), $49,974 (2 children), or $53,268 (3 or more children).
The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC)—like the American Opportunity Tax Credit (AOTC)—are refundable tax credits. But unlike regular tax credits, refundable tax credits are a form of welfare.
A regular tax credit is a dollar-for-dollar reduction of the amount of income tax owed. They include things like the Child Tax Credit, the credit for child and dependent care expenses, some education credits, the adoption credit, and the retirement savings contributions credit. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. Tax credits, like their cousins tax deductions, are always a good thing.
A refundable tax credit is treated as a payment from the taxpayer like federal income tax withheld or estimated tax payments. If the tax credit “payment” is more than the tax owed after the regular tax credits are applied, then the taxpayer becomes a tax receiver. He receives a refund of the money he never actually paid in. The money is simply taken from real taxpayers and transferred to him. Refundable tax credits are the ultimate form of welfare because they are payments made in cash like the TANF or SSI programs instead of payments made to a third party, like Medicaid, or deposited on an Electronic Benefit Card (EBC), as in SNAP (food stamps).
The AOTC is 100 percent of the first $2,000 plus 25 percent of the next $2,000 in qualified tuition and related educational expenses the taxpayer pays for each eligible student. No credit can be claimed if the taxpayer’s modified adjusted gross income exceeds $90,000 ($180,000 for joint filers). There is a phase-out for taxpayers with modified adjusted gross incomes over $80,000 ($160,000 for joint filers). Forty percent (up to $1,000 per student) of the AOTC is refundable.
The ACTC is available to taxpayers with a qualifying child who receive less than the full amount of the $1,000 per child tax credit because the tax owed is less than the allowable child tax credit. In that case, the amount of the War, Empire, and the M... Best Price: $16.00 Buy New $9.95 (as of 11:10 EST - Details) additional child tax credit is the smaller of the remaining child tax credit and 15 percent of the taxpayer’s taxable earned income above $3,000.
The EITC, according to the IRS, “is a benefit for working people with low to moderate income.” To quality, “you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.” The EITC has been around the longest, pays the most, and is the most used (and abused) refundable tax credit. Again, according to the IRS: “For the 2014 tax year, 27.5 million received about $66.7 billion in EITC during 2015. The average amount of EITC received nationwide was more than $2,400.”
The fiscal year 2016 omnibus appropriations bill included a tax extenders package that permanently extended the ACTC and its $3,000 threshold, the AOTC, and the more generous, but temporary, provisions of the EITC that were enacted in 2009. All of these things were set to expire in 2017.
Refundable tax credits no doubt played a role in the Department of Justice recently asking a federal court to shut down a Liberty Tax franchise owner in South Carolina for his role in preparing false tax returns “in order to receive inflated tax refunds” and the Maryland Comptroller suspending processing of tax returns from sixteen Liberty Tax franchises in his state for “a high volume of questionable returns received.” The tax returns in question included those where “business income was reported when taxpayers did not own a business,” “dependents were erroneously claimed,” and “wages were inflated.”
I saw this firsthand when I used to work as a tax preparer. A single woman with two or three kids would claim that her only income was from her business of cleaning houses. Her income, with very few business expenses, would always fall in the range necessary to receive the maximum earned income credit.
Each year, the IRS issues a list of common tax schemes called the “Dirty Dozen.” One of them concerns refundable tax credits.
Falsifying Income To Claim Tax Credits. It’s usual to think of taxpayers hiding income in order to avoid taxation but there’s another scheme involving misrepresenting income: inflating or including income on a tax return that was never earned, either as wages or as self-employment income, in order to maximize credits, especially refundable credits. Refundable tax credits are those like the Earned Income Tax Credit and the Additional Child Tax which require earned income in order to qualify. With a refundable credit, you can receive a refund even if you do not owe any tax. This provides some taxpayers (and unscrupulous preparers) with The War on Drugs Is a ... Best Price: $5.87 Buy New $5.95 (as of 11:10 EST - Details) an incentive to lie about income in order to claim the credit. Taxpayers who engage in this behavior not only have to pay back the erroneous refunds, including interest and penalties but may face criminal prosecution.
Americans who receive refundable tax credits get another added benefit as well. According to page 58 of the IRS’s 1040 instructions for 2015:
Any refund you receive as a result of taking the EIC can’t be counted as income when determining if you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. These programs include Temporary Assistance for Needy Families (TANF), Medicaid, Supplemental Security Income (SSI), and Supplemental Nutrition Assistance Program (food stamps). In addition, when determining eligibility, the refund can’t be counted as a resource for at least 12 months after you receive it. Check with your local benefit coordinator to find out if your refund will affect your benefits.
So, if refundable tax credits are a form of welfare and rife with fraud, why are they still in existence? Why do they have wide bipartisan support? And why does the maximum amount of the EITC increase every year?
I can give you the answer in one word: Republicans.
But I thought Republicans were opposed to welfare? I thought they were opposed to income transfer programs? I thought they were opposed to social engineering? I thought they were opposed to income redistribution schemes? Don’t Democrats criticize Republicans for their opposition to these things?
Republicans are not opposed in principle to any of these things. In fact, the EITC program began under a Republican president (Gerald Ford), increased under Republican presidents (Ronald Reagan and George H.W. Bush), and increased again when Republicans had a majority in the House and Senate for six years when Bill Clinton was president. When Republicans controlled both Houses of Congress under George W. Bush for over four years they could have easily abolished the EITC and all other refundable tax credits. They, of course, failed to do so. They were too busy expanding the federal budget and doubling the national debt.
Republicans are welfare statists just like Democrats.