The Tax Moves Blog

The Earned Income Tax Credit (EITC) is a critical refundable credit aimed at assisting low- and moderate-income workers, and it requires careful adherence to eligibility rules. Taxpayers must have earned income, such as wages or self-employment earnings, while investment income is capped at $11,600 for 2024. A valid Social Security Number (SSN) issued before the tax filing deadline is mandatory for both the taxpayer and qualifying children; SSNs issued solely for government benefits or without work authorization are not acceptable. Married taxpayers generally need to file jointly, though exceptions exist for those living apart from their spouse for at least six months or legally separated under state law. For individuals without qualifying children, additional criteria include being between 25 and 65 years old, residing in the U.S. for over half the year, and not being claimed as a dependent. For taxpayers with children, the child must meet relationship, age, residency, and joint return tests. Tie-breaker rules apply when multiple taxpayers claim the same child, with preference given to parents or individuals with longer residency or higher adjusted gross income (AGI). Compliance with these rules is essential for preparers, as inaccuracies can result in penalties up to $635 per violation under IRC Section 6695(g), underscoring the importance of thorough due diligence when handling EITC claims.

To qualify for EITC, taxpayers must meet these key criteria:

• Have earned income.
• Possess a valid Social Security number issued before the tax return’s due date.
• Be a U.S. citizen or resident alien all year.
• File a joint return if married, unless legally separated and meeting specific requirements.
• Have an adjusted gross income (AGI) below the applicable limits.
• Exclude Form 2555 (Foreign Earned Income) and limit investment income to $11,600.

For taxpayers with qualifying children, the children must meet relationship, age, residency, and joint return tests. For taxpayers without qualifying children, they must be at least 25 but under 65, not a dependent or a qualifying child of another taxpayer, and reside in the U.S. for more than half the year.

Tie-Breaker Rules
In cases where more than one person claims the same qualifying child, priority is given based on parentage, residency duration, and AGI. Detailed rules can be found in IRS Publication 596.

Some of the most common EITC errors include:

• Claiming a child or children who do not meet the qualifying child requirements.
• Filing with an incorrect filing status.
• Overreporting or underreporting income and expenses.
• Having more than one person claiming the same child.
• Filing with a Social Security number that does not match the name on the Social Security card.

The Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and Credit for Other Dependents (ODC) provide crucial tax benefits for families, with specific rules that preparers must navigate carefully. For 2024, the CTC offers up to $2,000 per qualifying child under age 17, with $1,700 being refundable, provided the child has a valid Social Security Number issued by the filing deadline. The ACTC applies when the nonrefundable portion of the CTC exceeds the taxpayer’s liability, and its refundability depends on earned income levels. In contrast, the ODC provides a nonrefundable $500 credit for qualifying dependents who do not meet the criteria for the CTC, including older children or other relatives. Eligibility for these credits phases out at $400,000 for joint filers and $200,000 for others, reducing by $50 for every $1,000 of income exceeding these thresholds. Dependents claimed for the ODC can have any taxpayer identification number (TIN) and must meet relationship, support, and residency requirements. Tax professionals must ensure accurate use of Schedule 8812 to calculate these credits, verifying dependent eligibility to avoid common errors such as claiming individuals without valid TINs or failing to meet residency and support tests.

• The Child Tax Credit (CTC) is $2,000 per qualifying child, and up to $1,700 is refundable for tax year 2024. The refundable amount is indexed for inflation each year.
• The qualifying child must have a valid Social Security number issued on or before the due date of the return (including extensions).
• The taxpayer and spouse, if filing jointly, must have a valid taxpayer identification number issued on or before the due date of the return (including extensions).
• The Credit for Other Dependents (ODC) is a non-refundable credit of up to $500.

• The total credit amount is phased out by $50 for each $1,000 (or fraction thereof) if the modified AGI exceeds $400,000 in the case of a joint return, $200,000 for any other filing status.
• Schedule 8812, Credit for Qualifying Children and Other Dependents, must be used to calculate the credit.
• The qualifying child must be under 17 years old at the end of the tax year.

CTC/ACTC Errors:

• Claiming individuals who do not meet the qualifying child requirements, including age, relationship, and support tests.
• Failing to ensure the child meets residency requirements, such as living with the taxpayer for more than half the year.
• Claiming the credit for a child without a valid Social Security Number (SSN) issued on or before the return’s due date, including extensions.

ODC Errors:

• Claiming the credit for dependents without a valid taxpayer identification number (SSN, ITIN, or ATIN) issued by the filing deadline.
• Failing to meet dependency requirements, such as providing more than half of the dependent’s financial support.
• Claiming individuals who do not satisfy residency requirements, such as living with the taxpayer for the entire tax year.

For 2024, taxpayers can claim 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000, providing a maximum credit of $2,500 per eligible student. Up to $1,000 of this credit is refundable, allowing taxpayers to receive it even if they owe no tax. Eligibility requires the student to be enrolled at least half-time in a program leading to a recognized credential, such as a degree or certificate, and the student must not have completed more than four academic years of higher education by the beginning of the tax year. Income limits apply, with the credit beginning to phase out for taxpayers whose modified adjusted gross income (MAGI) exceeds $80,000 for single filers or $160,000 for joint filers. The credit is completely unavailable when MAGI surpasses $90,000 for single filers or $180,000 for joint filers.

To be eligible for AOTC, the student must:

• Be pursuing a degree or other recognized education credential. 
• Be enrolled at least half time for at least one academic period beginning in the tax year.
• Not have finished the first four years of higher education at the beginning of the tax year.
• Not have been claimed for AOTC or the former Hope credit for more than four tax years. 
• Not have a felony drug conviction at the end of the tax year.

Some of the most common errors include claiming AOTC for a student who:

• Did not attend an eligible college, university or vocational school.
• Did not pay qualifying college expenses.
• Completed the first four years of college at the beginning of the tax year.
• Was claimed for the AOTC for more than four tax years.

The Premium Tax Credit (PTC) is a vital benefit for taxpayers enrolled in Marketplace health plans, providing financial assistance to help cover monthly insurance premiums. This credit is income-based, with recent legislation waiving the 400% income cap through 2025, making it accessible to more taxpayers. If the allowable PTC exceeds the Advance Premium Tax Credit (APTC) paid during the year, taxpayers may receive a refund or reduce their tax liability. To claim the PTC, Form 8962 must be completed, particularly if APTC was paid on behalf of the taxpayer, their family members, or anyone mistakenly included in their tax family.

The APTC is a monthly subsidy paid directly to insurance providers based on the Marketplace’s estimate of the taxpayer’s eligibility, which is calculated using household income and family details provided during enrollment. It is crucial for taxpayers to report any changes in income, marital status, or family size promptly to the Marketplace to avoid substantial repayment obligations or delays in refunds. These updates allow the Marketplace to adjust the taxpayer’s eligibility and subsidy amounts, ensuring the correct level of assistance is provided and preventing unexpected liabilities at tax time.

Form 8962, Premium Tax Credit, must be filed if:

• Your client takes the PTC.
• APTC was paid for your client or an individual in your client’s tax family.
• APTC was paid for someone your client told the Marketplace would be in the client’s tax family and neither the client nor anyone else included that person in a tax family.

Due diligence is a cornerstone of tax preparation, ensuring accuracy and compliance when claiming key credits like the EITC, CTC, ACTC, ODC, and AOTC. Tax preparers must meet four essential requirements to fulfill their due diligence obligations. First, they must ask thorough, open-ended questions to gather complete and accurate information about the taxpayer’s circumstances, avoiding leading queries that could result in incomplete or incorrect data.

Preparers must compute credits accurately, using reliable methods and approved worksheets, such as Form 1040 instructions or Form 8867, the Paid Preparer’s Due Diligence Checklist. This form must be completed and submitted with every tax return or refund claim involving the credits.

Tax preparers are required to maintain meticulous records for at least three years, including worksheets, documentation provided by the client, and notes from interviews. Lastly, any discrepancies or inconsistencies in the taxpayer’s responses must be addressed with reasonable inquiries, ensuring compliance with IRS standards. Failure to meet these requirements can result in significant penalties, currently set at $665 per violation under IRC Section 6695(g), along with potential audits of both the preparer and the client. Tax professionals must prioritize due diligence to maintain trust, avoid penalties, and uphold professional standards.