May 2014 : Selected Tax Provisions Related to Children of Divorce – Part 2

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information regarding two additional federal income tax provisions applicable to divorced or legally separated parents with one (or more) dependent child. Two other such provisions were presented in the April 2014 column.

Earned Income Credit

General Rule

IRC Section 32 provides for a refundable tax credit for taxpayers (1) with adjusted gross incomes (AGIs) under certain limits and (2) who have earned income. As indicated below, the credit increases significantly for taxpayers with one or more qualifying children.

To qualify, a taxpayer’s 2014 AGI must be less than:

• $14,590 ($20,020 if married filing jointly) with no qualifying children
• $38,511 ($43,941 if married filing jointly) with one qualifying child
• $43,756 ($49,186 if married filing jointly) with two qualifying children
• $46,997 ($52,427 if married filing jointly) with three or more qualifying children

The credit begins to phase out for taxpayers with one or more qualifying children who have a 2014 AGI of $17,530 or more and an AGI of $7,970 or more if no qualifying children. e phase-out continues from these AGIs through the amounts shown above.

Also, a taxpayer’s investment income – interest, dividends, capital gain, etc. – cannot exceed $3,350 in 2014.

The maximum credit for 2014:

• $496 with no qualifying children
• $3,305 with one qualifying child
• $5,460 with two qualifying children
• $6,143 with three or more qualifying children

The requirements for “qualifying child” are essentially the same for claiming a dependency exemption for a child.

“Earned income” includes salaries, wages, other forms of employee compensation, and self-employment income.
e IRS will calculate the credit. For taxpayers who want to calculate the credit, there are tables included in both 1040 and 1040A instructions.

Example

John and Mary, who file jointly, have:

• Earned income of $25,000.
• Investment income of $1,000
• Two qualifying children

Because their $26,000 AGI is less than the $49,186 limit and their $1,000 investment income does not $3,350, they are entitled to the earned income credit (EIC). They refer to the EIC table in the 1040A instructions and find their credit is $4,813.

Practice Pointers
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Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)