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2012 CCH Whole Ball of Tax
EITC, Other Tax Breaks for Unemployed or Underemployed Can Add Up – If People Know About Them, CCH Says
(RIVERWOODS, ILL., January 2012) – People who are unemployed or underemployed hope their situation is only temporary. However, the temporary nature of these circumstances can also mean it’s easy to overlook some important tax nuances that come with having limited income, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Many people over their working years tend to see only incremental changes in their income level year to year, and generally upward,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “So if they lose a job or need to take a position at a much lower wage, there are tax credits and deductions that they are unaware of but may now be eligible for.”
EITC and Other Credits
One of the most broadly available credits for people with a low or moderate income is the Earned Income Tax Credit (EITC). As the name implies, a taxpayer must have earned income in order to qualify, for example from wages or self-employment. Income from other sources, such as a pension or alimony, doesn’t count.
The EITC is a refundable credit, meaning even if someone doesn’t owe any tax, they can still receive money back from the credit. The credit amount is based on the taxpayer’s income and number of qualifying children, with additional credit being given for up to three children. The maximum EITC for 2011 is $5,751, increasing to $5,891 for 2012. The maximum earned income limit for claiming the EITC is $49,078 for 2011, increasing to $50,270 for 2012.
Luscombe noted that while the credit is valuable to many taxpayers, it also has a reputation for discouraging marriage.
“Some people have said the EITC hurts marriage among low-income people because combining even two lower incomes can jeopardize your eligibility for the credit,” Luscombe said.
For example, if two individuals in 2011 each earned $25,000, had one child and filed as single head of household, they could each be eligible for a tax credit of $1,762 on their 2011 tax return. However, if they had married and filed jointly with a combined income of $50,000, they would not be eligible for any EITC in 2011.
There are several other tax breaks that are generally available to low or moderate income taxpayers more so than high-income earners. These include the child tax credit and education credits. (See Release 22 for additional detail on education credits.)
Tax Deductions and Breaks
In addition to credits, people who are looking for work can also benefit from tax deductions related to their job search. This includes expenses for sending out resumes, long-distance calls, travel and lodging for out-of-town interviews. However, these can only be claimed as expenses by taxpayers seeking a position in their same trade or business.
Moving expenses may also be tax deductible if someone’s new workplace is at least 50 miles farther from their old residence than the old residence was from their former workplace.
Being unemployed, however, is not tax free. People receiving unemployment benefits are expected to have both state and federal taxes withheld from their unemployment benefit checks, just like they did with their paychecks. The state informs beneficiaries of this option and does the withholding.
Beneficiaries can choose, however, not to have taxes withheld from their unemployment income. If they do this, they are required to file quarterly estimated taxes with the IRS and their state treasury department. Failure to pay taxes through withholding or estimated taxes may subject them to a late payment penalty as well as the outstanding taxes.
While the unemployed may have to pay taxes on their benefits, employers who hire unemployed workers can realize certain tax breaks. These include:
- Retained Worker Business Credit : A provision in the 2010 Hiring Incentives to Restore Employment (HIRE) Act, provided that employers who hired employees after February 3, 2010 and before January 1, 2011 who were previously unemployed or employed for 40 hours or less for the previous 60 days and kept these workers for at least 52 consecutive weeks could claim a tax credit. This credit, which employers will realize in 2011, is the lesser of $1,000 or 6.2 percent of wages paid by the employer to the retained worker during the previous 52 weeks. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal at least to 80 percent of the wages for the first 26 weeks.
- Returning Heroes Tax Credit and the Wounded Warriors Tax Credit: Enacted in 2011, this extends the Work Opportunity Tax Credit, which already provides employers a tax credit for hiring individuals from various disadvantaged groups. Now, employers who hire veterans who have been looking for employment can be eligible for a tax credit up to $9,600 per employee, depending upon the length of time the veteran was searching for a job and if they also have a disability. (See Release 19 for additional detail on the military and taxes.)
Taxability of Temporary Work
People who take on temporary freelance positions can take additional deductions available to the self-employed. This includes deducting 100 percent of health insurance premiums; expenses for a home office, such as a proportionate share of utilities and the depreciation on the home office; journals and dues for unions or professional associations; advertising and marketing; gifts valued up to $25 to business associates; postage; business-related legal and professional services; and business travel expenses. Additionally, they can take depreciation on office equipment and may be eligible for certain small business credits.
However, self-employed people, who exceed the allowable wage threshold for their state’s unemployment benefits from self-employment, would no longer be eligible for any unemployment benefits even if they stopped working completely.
Additionally, the self-employed must pay both income taxes as well as pay into Social Security and Medicare under the Self-Employment Contributions Act (SECA) if they made more than $400 in income while self-employed. This tax is the self-employed individual’s version of the FICA payroll tax, but more costly to the individual as they must pay the entire amount.
For 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided a one-year payroll tax break, which applied to both employees and the self-employed. As a result, the amount of Social Security tax the self-employed needed to pay in 2011 was 10.4 percent on earning up to the $106,800 threshold as well as 2.9 percent for Medicare tax on all self-employment earnings. The amount of income taxed for Social Security purposes increases to $110,100, for 2012 and the Social Security tax for self-employed increases from 10.4 percent to 12.4 percent after the first $18,350 of self-employment income, reduced by any wage income, is earned for the year ($18,350 is the proportion of the $110,100 allocable to the period January 1 to February 29, 2012. Congress is expected to try to extend the Social Security tax reduction to the rest of 2012).
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands.
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