Are you expecting a tax refund this year? If you are eligible for the Earned Income Tax Credit, one might be coming your way. Though the refunds are greater if you have children, even those without children can qualify, as long as you or your spouse (if married filing jointly) are between the ages of 25 and 65.

The problem for most people trying to claim the credit is that the rules seem complicated, but using TurboTax makes it simple. In addition to TurboTax software making it easy to claim the credit,  Intuit, maker of TurboTax also has the EITC Finder, which is a free smartphone app that makes determining eligibility easy.

Here are the rules for claiming the tax credit:

Your wages and self-employment earnings are the basis for the credit. You also can have interest, dividends and other investment earnings, but not more than $3,200 in 2012. For most of us, with interest rates at rock bottom, that isn’t a problem.

How much you can earn and qualify for the tax credit may depend on how many dependent children you have.

For 2012 if you have:

• Three or more children, you can earn up to $45,060 and qualify
• Two children, that drops to $41,952
• Only one child, your earnings and adjusted gross income can’t top $36,920
• No children? No problem, as long as your income is less than $13,980.

The refundable tax credit can give you tax credits ranging from a maximum of $5,891 if you have three children, to $475 if you have no children.

Here’s the best part: Most tax credits only apply against taxes you owe. If your tax is zero, you get no benefit. But if the earned income credit is greater than the tax you owe, the IRS will send you the difference. For example, if your credit is $1,200 and you owe $800 in taxes, you’ll get a check from the IRS for $400. How sweet is that?

Now for the fine print: If you are married but file separate returns as “married filing separately” you don’t qualify for the earned income credit. And if you share custody and your child has lived in your household for more than half the year, that child can qualify you for the credit even if the other parent is entitled to claim the exemption for the child on their tax return.

If you are eligible for the federal tax credit and you live in one of the 25 states that also has the credit, your benefits may be multiplied. And even if you normally make too much to qualify for the credit, if you lost your job and were out of work in 2012, you may still qualify for that year.

Remember if you have any questions about this tax law, you can call and ask our CPAs, tax attorneys, or IRS enrolled agents your question for free.

Indeed, summer vacation is greeted eagerly by children around the country (but not in my household, where my oldest is routinely distraught in late June by the reality of no school for an extended period). As for parents, they must prepare for challenge number one: keeping their children busy and out of trouble without breaking the bank.

Enter summer camp

Indeed, summer camp remains a ritual of growing up for some families.  Depending on the camp, the expense varies widely.  Fortunately, there is tax help – maybe.

The Child and Dependent Care Tax Credit  – Qualifications and Expense Limits

The Child and Dependent Care Tax Credit can be applied to summer camp expenses, subject to certain restrictions.  Your first consideration is the type of summer camp.  If your child sleeps over at the camp, that camp does not qualify.  In addition, if your child is 13 or older, he or she’s out – only expenses for kids 12 and under qualify for this credit.

Of course, it’s not as though you’ll instantly get tax help even if you decide to send your nine-year-old to day camp. That’s because there is another limit to the credit.  Once the total dollar amount spent on child care exceeds $3,000 per year for one qualifying child (or $6,000 for two or more qualifying children), you reach the maximum expense for which you can apply the credit towards.  This maximum amount includes not only day camp but also any child care expenses (including a nanny) you incur throughout the year.

Calculating the Child and Dependent Care Tax Credit

The calculation of the credit is based on the number of children under 13, your total child care expenses, and your adjusted gross income (AGI).  If you have one child and spend the maximum or more, you can multiply the top dollar amount ($3,000) by a rate based on your AGI which ranges from 20% to 35%.  The 20% rate applies to households whose AGI exceeds $43,000. Your income must be less than $15,000 to benefit from the maximum 35% rate.

If you have one qualifying child and earn $43,000 or more, your maximum credit may be $600 ($3,000 multiplied by 20%). If you have two or more qualifying children and $6,000 or more in expenses, you may receive a credit of $1,200 ($6,000 multiplied by 20%).  Keep in mind a credit reduces your taxes dollar-for-dollar and therefore may be more valuable than a tax deduction.

The Child and Dependent Care Tax Credit won’t make summer camp free, but it just might make it more affordable.  Just remember to use part of the savings for bug spray.

First-Time Homebuyers Tax Credit

Under 2008 legislation designed to stimulate the housing market, first-time homebuyers could claim a tax credit of up to $7,500 if they purchased a home between 4/8/08 and 12/31/08. But there was a catch: the credit wasn’t a gift from the government, it was really an interest-free loan that had to be repaid over fifteen years, beginning in 2010.

So, beginning in 2010 you had to file Form 5405 with your tax return each year and add 1/15 of the credit to your taxes owed. For example, if you received the maximum credit of $7,500, you’d divide that credit by 15 and add $500 to your income taxes each year for the next 15 years.

But here’s the problem – most people don’t stay in their home for 15 years. And when you sell your home, the remaining unpaid tax credit is added to your taxes for that year. So if you claimed the $7,500 credit in 2008, repaid $500 with your 2010 tax return, and sold your home in 2011, be prepared for an additional $7,000 tax bite when you file your tax return in April. Ouch!

What if your house didn’t increase in value, and you end up making next to nothing on the sale? Recognizing that the credit repayment could easily exceed the amount you realize, the IRS caps the amount you owe in recapture to the amount of the gain you realize. So if you bought your home for $150,000 and your sales proceeds after costs of sale are only $152,000, the maximum credit you’d have to repay is $2,000.

Here’s another trap to beware of. You don’t have to sell the home to become liable for the tax credit repayment. You can trigger the tax recapture by moving out of your home, even if you continue to own it. So if you moved out in 2011 and kept the home as a rental property, boom – you owe the rest of the tax credit with your 2011 tax return.

Fortunately the IRS has some mercy when circumstances are beyond your control. For example, if you deed your home to your spouse in a divorce settlement, there’s no recapture of the tax credit (but your spouse does have to repay the credit over the remainder of the fifteen years and triggers the recapture if he or she moves out within the 15-year period).

If you lose your home in a foreclosure, your repayment is limited to the amount of the gain. And if you die, you are off the hook as well. And if you or your spouse are in the military and sell because of an order to relocate for extended duty, you don’t have to repay the credit.

The 2008 credit had its traps and pitfalls, but it did help people buy the house they wanted and stimulated home sales. That’s why Congress later extended it to 2009 and 2010. Sorry to say, this isn’t a case where the early bird gets the worm.

When the credit was extended, it was increased to $8,000, expanded to include a reduced credit for those who were not first-time homebuyers, and only has to be repaid if the taxpayer moved out within three years. Unfortunately, those features were not applied retroactively to 2008, leaving early-adopters with an obligation to repay the tax credit that those who came later to the party didn’t have to.

Earned Income Tax Credit

Earned Income Tax Credit Eligibility

To qualify for the EITC, you must have a Social Security Number, work for pay, and earn less than a certain dollar threshold (amounts detailed later).  There are many other requirements including USA citizenship/resident alien status and limitations on investment and foreign income, but those are typically not issues for people otherwise qualified for the EITC.

Work for Pay

Unemployment income doesn’t help you qualify for the EITC. Neither does bank interest.  In order to receive any money via the EITC, you must work. You can have a traditional job as an employee or you can be your own boss and earn money from self-employment.  But one way or another, you’ve got to earn some money in order to qualify for the EITC.

Income Limits

For the 2011 tax year (the tax return you’re about to file), your earned income (what you receive due to your work), and your adjusted gross income (AGI, the sum total of all of your earnings less certain deductions) must be less than:

• $43,998 ($49,078 married filing jointly) with three or more qualifying children

• $40,964 ($46,044 married filing jointly) with two qualifying children
• $36,052 ($41,132 married filing jointly) with one qualifying child
• $13,660 ($18,740 married filing jointly) with no qualifying children

Qualifying Children

As you can see above, the relevant income limits are much more generous if you take care of at least one qualifying child.  Your child qualifies if he or she meets all of the following conditions:

• Has a valid Social Security Number
• Is your child (natural, adopted or foster), grandchild, sibling, step-sibling, half-sibling, niece, or nephew
• Younger than you and younger than 19, unless a student (in which case your child must be less than 24), or totally and permanently disabled (in which case there is no age limit)
• Lives with you in the United States for more than half of the year
• The child doesn’t file a joint tax return.

For more information or to help determine your eligibility for the Earned Income Tax Credit, use EITC Finder app by Intuit.

Claiming the EITC

The EITC Finder  app and TurboTax can help you claim the Earned Income Tax Credit.  Note that unlike many other tax credits, the EITC is a refundable tax credit. This means that the EIC can not only eliminate any income tax liability you might otherwise face but, to the extent your tax credit exceeds your liability, you can pocket the difference. It is for this reason that the EITC is one of the most important tax considerations.

Make sure to review the table above and use the EITC Finder app– if your income is below the relevant threshold, .  It just might mean an extra $2,000 or more in your pocket. Few other tax maneuvers can earn you that kind of cash!

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Boost your retirement accounts

While you have until April 17^th to make contributions to your IRA, you only have until the end of the year to boost contributions to your employer-sponsored plan, such as your 401(k) or 403(b) plans. The benefits are twofold: pre-tax contributions to these accounts not only reduce your overall tax bill, but also build up your savings. With just a few more pay periods to go, try to max out – ideally, stashing away a total of $16,500, or $22,000 if you are 50 or older.

Review Investments

It’s been a wild ride on Wall Street this year, so carefully review your portfolio statements to assess your investments’ overall performance. After all, recognizing capital gains and losses before ringing in the New Year, helps minimize your net capital gains tax and maximizes deductible capital losses. Any investments you want to sell? Consider doing it before the end of the year. You can deduct up to $3,000 of losses against ordinary income.

Improve your home

If you haven’t already maxed out your home energy tax credits in previous years, make 2011 the year to do it since the Residential Energy Tax Credit expires at the end of the year!  The tax credit is worth 10% of the cost up to $500 for insulation, roofs, skylights, and doors, up to $200 for new windows, and up to $300 for heating and air conditioning systems. Upgrades must be installed by Dec. 31^st in order to claim the tax credit. For more specifics, including various restrictions and other details, go to http://www.energystar.gov.

Defer income (until 2012); accelerate deductions (into 2011)

Are you owed any self-employment income? A bonus, perhaps?  It may be worth checking whether payments can be delayed until the start of next year.

This strategy not only minimizes taxable income for 2011 (something to think about, particularly if you anticipate being in a lower tax bracket in 2012), but it may also enable you to claim larger tax deductions, credits, and other tax breaks for 2011 that are phased out over various levels of AGI. Specifically, things like child tax credits, higher education tax credits, and the above-the-line deduction for higher education expenses and the tax deduction for student loan interest meet these requirements.

Pay Bills Early

Prepaying some of your bills can also save you money. For example, if you pay your January mortgage in December, you can deduct the January interest payment this year. This gives you 13 months’ worth of tax deductible interest in 2011, thus boosting this year’s total tax savings.

Give the gift of cash

We currently have very generous estate and gift tax exclusions.  The gift tax exclusion allows you to give gifts valued up to $13,000 per person per year($26,000 per husband-wife team) to any number of recipients without being taxable.  Estate tax applies to the taxable estate at death.  An estate tax return may need to be filed, however if the gross estate less allowable deductions is less than $5 million, the decedent is not required to file an estate tax return.  While the $5 million lifetime exclusion (which expires at the end of 2012) may only be relevant for the wealthiest Americans, the annual $13,000 gift exclusion disappears forever if you fail to use it by the end of each year. In most cases, the gift isn’t complete until the recipient of a check cashes or deposits it.

Be charitable

Donations to qualified charities, whether made via cash, check, or other monetary gift, need to be substantiated with the proper documentation, as do miscellaneous clothing and household gifts. Donations can add up to hundreds of dollars in tax deductions; to determine your item’s fair market value, use the free online tool “ItsDeductible.” Also, just a reminder: you have to itemize your tax deductions in order to get the break.

Here are 5 important facts about this tax credit for child care expenses:

The Child & Dependent Care Credit

First, some basic information about the credit itself. It’s called the Child & Dependent Care Credit. The IRS covers the ins and outs extensively in an article on the credit, but we’ll summarize the key points here:

• The care must be provided for a qualifying person who is your dependent under the age of 13  when care was provided.  Note: Care may also be provided for your spouse or certain other dependents who are physically and mentally incapable of self-care.
• Your child or qualifying person must be in summer camp or daycare so that you can work or look for work (not just because you don’t feel like watching them).
• Your tax filing status must be single, married filing jointly, head of household, or qualifying widow(er) WITH a dependent listed on your return.
• The child must have lived with you for more than half of the tax year in question (2011, in this case).
• The care provider must be identified in your tax return and CANNOT be your spouse, the parent of your qualifying person, or your dependent child under the age of 19 by the end of the tax year.

Overnight Camps Don’t Qualify

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Many parents will be relieved to hear that summer camp expenses can be deducted from their taxable income on 2011′s return. Unfortunately, there is a small caveat. While day camps (and daycare facilities) are eligible for deduction, overnight “stay-away” camps are not.  Attempting to deduct overnight camp expenses via the Child & Dependent Care Credit could land you in serious trouble in the event of an audit later on.

Home Babysitter or Daycare Facility?

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Other parents will ask whether the credit applies only to established day care centers and summer camps, or whether it also applies to at-home babysitters. Luckily, it applies to both. So long as you meet the requirements for the Child & Dependent Care Credit, it does not matter whether the care is provided by a facility or a personally chosen babysitter. You simply need to provide your babysitter’s Social Security number on Form 2441.

What if your babysitter doesn’t provide their Social Security number, or you can’t track them down in time to file your return? The IRS says:

Answer: If you meet the other requirements to claim the child and dependent care credit, but are missing the social security number or taxpayer identification number of a provider, you may still try and claim the credit by demonstrating “due diligence” in attempting to secure this information. To prove you used “due diligence”, request that your day care provider fill out Form W-10, Dependent Care Provider’s ID and Certification to request the necessary information.  If this form is not used, you can use the following sources:

• Copy of the provider’s social security card.

• Copy of the provider’s completed Form W-4, Employee’s Withholding Allowance Certificate.

• Copy of a statement furnished by your employer if the provider is on your employer’s dependent care plan.

• Letter or invoice from provider.

The taxpayer must provide whatever information is available about the provider (such as name and address) on Form 2441 (PDF),Child and Dependent Care Expenses.  Write “see page 2″ in the columns requesting the missing information. Write at the bottom of page 2 that the provider refused to give the requested information.  Daycare providers who refuse to give the necessary information will face penalties.

Please note, if the daycare provider is a tax-exempt organization, such as a school or church, then you do not have to show the taxpayer ID number.  You can write “tax-exempt” in the space where the number is required.

35% of Qualifying Expenses

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A common misconception about the Child & Dependent Care Credit is that you can deduct ALL of your qualifying expenses. This is actually untrue. You are only eligible to deduct 20%-35% of qualifying expenses, depending on your adjusted gross income. The higher your adjusted gross income, the lower the percentage of the deduction.

The rules have not yet been changed for 2011, but last year, the requirements were:

Other Creditable Expenses

(source)

Daycare or babysitting fees are the main deductible expenses, but they are not the only ones. You are also eligible to write-off the costs of ancillary services related to care, such as meal preparation or even housecleaning (if you hire a qualifying at-home babysitter.) The key to doing this successfully, as with other credits and deductions, is keeping extremely solid records.

The IRS knows how easy it is for unscrupulous taxpayers to invent “costs” out of thin air. Being targeted with an audit could mean the IRS is suspicious of that. The only way to protect yourself is with hard documentation proving your write-offs were valid. Our blog post Would Your Tax Records Survive a Natural Disaster was written precisely because records are so important – don’t neglect them when deducting summer care costs!

For more information related to this topic also check out our blog,  Writing Off Your Summer:  Preparing for Next Tax Season and Who Can I Claim as a Dependent for This Tax Year.