In yet another effort to reach out to Indiana taxpayers, the Indiana Department of Revenue has created a new Earned Income Tax Credit, a credit that was spawned from the former Earned Income Tax Deduction.
This credit may not affect you personally, but you may have friends or family members who can benefit from this credit and you will be doing them a service if you explain it to them'Mark St'John, Executive Director of The Indiana Coalition on Housing and Homeless Issues estimates that as many as 132,000 Indiana families may be eligible to benefit from this credit.
On 1998 tax returns, taxpayers who supported a child in their homes and who had adjusted gross income of under $12,000 were eligible for a tax deduction of $12,000 minus the amount of their income'There was a stipulation that 80% of the taxpayer's income had to be earned income, such as income from a job or from self-employment'The $12,000 adjusted gross income amount applied to both single and married taxpayers.
One of the big drawbacks of claiming the Earned Income Tax Deduction in prior years is that you had to file Schedule 1 with your Indiana tax return in order to take advantage of this deduction'Many taxpayers with income of under $12,000 may not use Schedule 1 and may have been unaware of this deduction, which was designed to help them'In addition, this deduction could not reduce your income below zero, so if your taxable income was reduced by personal exemptions and a renter's deduction, the Earned Income Tax Deduction provided little or no benefit'(Note, however, that if you could have benefited from this deduction and did not claim it, you may file form IT-40X to amend your prior year tax return and claim the deduction.)
The earned income tax deduction has been reborn this year in the form of the Indiana Earned Income Tax Credit, a tax credit that works essentially like the former tax deduction, with some extra icing on the cake'This credit is a refundable credit, which means that even if your income has been reduced by exemptions and deductions, you may still qualify to receive a refund due to the effect of this credit.
Do you qualify?
- To qualify for the new Indiana Earned Income Tax Credit, you must meet these requirements:
- You must be an individual, or couple filing a joint return, and have at least one child who is your child, stepchild, or foster child and who is under age 19 and single as of 12/31/99'The child must have lived with you for more than half of 1999, and you must have provided at least half the support for this child.
- You must have total Indiana income of no more than $12,000'Total Indiana income is usually your federal adjusted gross income.
- At least 80% of your total Indiana income must be income earned from employment or self-employment.
Computing the Credit
To compute the credit, if you meet the above qualifications, start with $12,000, and then deduct your total Indiana income'Multiply the result times 3.4% (the Indiana income tax rate)'Therefore, if your total Indiana income is $10,000, your credit would be $12,000-$10,000 or $2,000 times $3.4%, which comes to $68.
Although the credit is computed on your total Indiana income, your tax may be computed on an amount that is substantially less, due to reductions for personal exemptions, exemptions for dependent children, rent paid, and property taxes paid'Even if your tax return results in a refund of Indiana taxes before the Earned Income Credit is applied, you will still be entitled to an additional refund for the amount of the credit.
For example, your total Indiana income of $10,000 might be reduced to $4,000 for purposes of computing income tax, by taking a $1,000 personal exemption for yourself, $2,500 in exemptions for your child, and $2,500 in a deduction for rent paid to an Indiana landlord (these deductions are based on the new higher deductions that apply to all 1999 Indiana taxpayers).
The tax on $4,000 at 3.4% is $136'If your withholding from your job was $272, your refund would be $272 minus the tax of $136, or $136.
Applying the Earned Income Tax Credit of $68 reduces your tax to $68 ($136 minus $68)'If your withholding was $272, which would be the standard state income tax withholding for a taxpayer claiming two exemptions, your refund will be $136 (the refund computed above) plus the $68 credit, or $204.
Taxpayers will have to file the regular form IT-40, as opposed to the IT-40EZ to take advantage of this credit, because the IT-40EZ is only for taxpayers with no dependents'The Earned Income Tax Credit will appear on page one of the IT-40.
copyright © 2000 Gail Perry - Fun with Taxes