Tag Archives: Taxation

Podcast – The Earned Income Tax Credit | LEGAL THOUGHTS

Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published September 28, 2020.

 

The Earned Income Tax Credit - Podcast - Legal Thoughts

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Mayra Torres, the Public Relations Associate of Coleman Jackson, P.C.   The topic of discussion is “The Earned Income Tax Credit “. You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

 

TRANSCRIPT:

ATTORNEY:  Coleman Jackson
LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY:  Coleman Jackson

Welcome to Tax Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas
  • Our topic for today is: “The Earned Income Tax Credit.”
  • Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
  • On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: “The Earned Income Tax Credit.”

Interviewer:  Mayra Torres, Public Relations Associate

  • Good afternoon everyone. My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C.  Coleman Jackson, P.C. is a taxation, litigation and immigration law firm based right here in Dallas, Texas.
  • Attorney many families’ household income during this dreadful Covid-19 pandemic has been terribly cut to the core. I mean folks are struggling financially just to pay their bills, keep a roof over their heads and buy basic food and necessities.  Besides killing way too many people, this virus has destroyed people’s livelihoods.  Folks can hardly make a fraction of the amount of money they were making before this dreadful disease happened.
  • This is a general question and I’m not sure even how to ask this question:
  • Question 1:

I recently heard some families talking about something called earned income tax credit.  What is an earned income tax credit, who qualifies and how do they apply?

Attorney Answers Question 1:

  • Good afternoon Mayra.
  • Internal Revenue Code Section 32 allows an earned income tax credit for certain eligible individuals who work and meet certain criteria established under Section 32. The income tax credit is a refundable tax credit based on earned income that is available to certain low to modest wage earners.  IRC Section 32 applies to individuals not corporations, partnerships, or any other form of business entity.  The earned income credit is designed to offset some of the cost of living expenses for low to modest income taxpayers to ease the economic strain and rigor on them and their families.

Interviewer:  Mayra Torres, Public Relations Associate

Question 2:

  • Other than the work requirement and being an individual, what are the other qualifying criteria for the earned income credit?

Attorney Answers Question 2:

  • In order to qualify the individual taxpayer must meet a number of different requirements. Different sets of rules apply in determining the earned income credit for taxpayers with qualifying children and taxpayers without qualifying children.  If an individual is the qualifying child of more than one taxpayer, only one taxpayer can claim that person as a qualifying child for purposes of the earned income credit.  Internal Revenue Code Section 32 also establishes certain qualifying income levels and provide phase out provisions blocking high income individuals from benefiting from the earned income tax credit.

Interviewer:  Mayra Torres, Public Relations Associate

Question 3:

  • Attorney could you explain in more details the following distinctions:
    1. What are the qualifying criteria for taxpayers with children?
    2. What are the qualifying criteria for the earned income credit for taxpayers without children?

Attorney Answers Question 3:

  • Mayra, that is an excellent idea to hopefully help our listeners to understand this better. Let metake these in the order that you have suggested:
  • First: The Taxpayer who have a qualifying child for the tax year is eligible for the earned income tax credit if she meets the following seven requirements in addition to the earned income criteria –
    1. the taxpayer has taxable income for the tax year;
    2. the taxpayer’s adjusted gross income does not exceed a specified ceiling amount;
    3. the taxpayer does not have more than a specified ceiling amount for investments;
    4. the taxpayer is a United States Citizen or Resident for the entire year and if married, the taxpayer is married to a United States Citizen or Resident or, if taxpayer is married to a nonresident, the taxpayer must file an election for the nonresident to be taxed as a Resident. In this event the nonresident’s worldwide income is subject to U.S. taxation;
    5. the taxpayer must use the filing status of married filing jointly, single, head of household, or widower with children. Taxpayer cannot qualify for the earned income tax credit filing married filing separate;
    6. the taxpayer has a valid social security number; and
    7. the taxpayer does not claim the foreign earned income tax credit or the foreign housing tax credit
  • Second: The Taxpayer who does not have a qualifying Child during the tax year is eligible for the earned income tax credit only if the taxpayer meets all four of the following requirements in addition to the earned income criteria:
    1. The taxpayer and spouse; if any, are between the ages of 25 and 64. Note that the couple can meet this particular requirement if either the taxpayer or the taxpayer’s spouse is within these age requirements;
    2. The taxpayer resided in the United States for more than half the tax year;
    3. The taxpayer was not claimed as a dependent on another taxpayer’s tax return for the tax year; and
    4. The taxpayer is not a qualifying child of another taxpayer for the tax year.

 Interviewer:  Mayra Torres, Public Relations Associate

Question 4:

  • Attorney what is a qualifying child for the purpose of the earned income tax credit?

Attorney Answers Question 4:

  • A qualifying child is defined in Internal Revenue Code Section 32 as someone who meets four tests:
    1. The child must be the taxpayer’s son, daughter, stepchild, adopted child, foster child, or a descendant of such person or the taxpayer’s brother, sister, half brother or sister, stepbrother or stepsister, or a descendant of such person;
    2. The child must be under 19 years of age at the end of the tax year and the child must be younger than the taxpayer or the taxpayer’s spouse if the couple is filing a joint tax return. There are special rules that applies to students and disabled individuals when it comes to the earned income credit age requirements;
    3. The child must live in the taxpayer’s home within the United States for more than six months out of the tax year. There are certain temporary absences rules that applies in calculating the residency requirement under Internal Revenue Regulations Section 1.152-2(a)(2)(ii);
    4. The married child of the taxpayer cannot be a qualifying child of the taxpayer  if the married child of the taxpayer files a tax return with their spouse; except, solely for the purpose of filing a claim for refund and the married child is the taxpayer’s dependent.

Interviewer:  Mayra Torres, Public Relations Associate

Question 5:

  • That That is a lot to digest! I mean what types of income is included to determine whether the taxpayer meets the earned income criteria in the first place?
  • And what happens if the taxpayer misunderstands these tax rules and claims the earned income tax credit by mistake or something?

Attorney Answers Question 5:

  • For clarity purposes Mayra; let me answer your two questions step by step:
  • First:
  • What types of income is included to determine whether the taxpayer meets the earned incomecriteria in the first place?
  • Earned income typically consists of-
    1. Wages, tips, and other types of employee compensation;
    2. Net earnings from self-employment;
    3. And certain taxable disability payments received by a taxpayer prior to reaching the minimum retirement age;
    4. Extra pay earned by active duty soldiers in a military combat zone pursuant to Internal Revenue Code Section 112;
    5. There might be other types of income, but, these are the basic categories of income that are included in computing the earned income tax credit. I might add that some categories of income are specifically excluded from income for purposes of computing the earned income tax credit, such, investment income, social security income, welfare benefits, unemployment compensation, community property income and any other income exclusions specifically mentioned in Internal Revenue Code Section 32(c)(2)(a)(i).
  • What was your second question Mayra? Could you repeat it again?

Interviewer:  Mayra Torres, Public Relations Associate

Question 6:

  • Oh, sure I would be glad to attorney. My question was-
  • What happens if the taxpayer misunderstands these tax rules and claims the earned income tax credit on their filed tax return by mistake or something?

Attorney Answers Question 6:

  • Taxpayers are responsible for the accuracy of any tax return that they file or someone else files on their behalf with the Internal Revenue Service and there can be civil and criminal consequences for filing inaccurate returns. Detailed Earned Income Computation Worksheets are contained in IRS Publication No. 596.  The taxpayer should read this publication very carefully, especially, if they prepare their own tax return and are contemplating claiming the earned income credit.
  • In the event the taxpayer is using a paid tax return preparer to prepare their return and claim an earned income tax credit, they must perform their due diligence in selecting a qualified tax return preparer. The tax return preparer who is a paid tax return preparer of a tax return claiming the earned income credit must sign the return and complete and sign Form 8867, Paid Preparer’s Earned Income Credit Checklist and attach it to each return filed with the IRS claiming the earned income tax credit.  Form 8867 also applies to returns filing head of household, child tax credit and additional child tax credit.  The taxpayer must make sure Form 8867 is properly completed and filed with their tax return; so that, they can demonstrate that they possibly acted in good faith and reasonable in claiming an earned income credit for the tax year.  This could form the basis for a reasonable cause defense in the event the IRS challenges the earned income tax credit position on the tax return; or these due diligence steps could form the basis for a tax preparer negligence claim.  There is an inflation adjusted preparer penalty of $500 which applies when the tax preparer fails to complete Form 8867.
  • If a taxpayer claims the earned income credit in a previous year though they were not eligible and the IRS determines that the error was due to reckless or intentional disregard of the earned income credit rules, the taxpayer could be prohibited from claiming the credit on subsequent tax returns for two years pursuant to Internal Revenue Code Section 32(k)(1)(B)(ii).

Mayra’s Concluding Remarks

  • Attorney, thank you for very clear responses to all my questions concerning the Earned Income Credit.
  • I understand the earned income tax credit better now than when we first began discussing it this afternoon.
  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to our podcast. Everybody take care!  And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Dallas, Texas 75206.
  • English callers: 214-599-0431 and Spanish callers:  214-599-0432.

Coleman Jackson, Attorney’s concluding remarks:

 THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

  • Thanks for giving us the opportunity to inform you about the earned income tax credit. If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Stay tune!  Watch for a new Legal Thoughts podcast in about two weeks.  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

Federal Taxation and Cutting Horses:  It’s Not Just About The Horses

By:  Coleman Jackson, Attorney, Certified Public Accountant
December 16, 2019

Federal Taxation and Cutting Horses: It’s Not Just About The Horses

Recently I came across a United States Tax Court memorandum decision dated November 25, 2019 involving a South Dakota farmer with a cutting horse and seed business.  The issues in the case that struck me were (1) whether the taxpayer’s cutting horse activity was an activity “not engaged in for profit” within the meaning of Section 183 of the Internal Revenue Code, and (2) whether the taxpayer should be required to pay the accuracy-related penalties under Section 6662(a) of the Internal Revenue Code.  The case was Lowell G. Den Besten, Petitioner v. Commissioner of Internal Revenue, Respondent, T.C. Memo 2019-154 (November 25, 2019).  Note that Tax Court Memo decisions cannot be used as precedent by other taxpayers.  So this blogs aim is to pull general observations from the Besten case because federal taxation and cutting horses is not just about the horses.

 

The significant thing for other individuals and businesses who find themselves tangled in a spirited horse race with the IRS is not whether they are in the cutting horse business or whether or not they are in the seed business

The taxpayer won on two of the three issues argued before the U.S. Tax Court.  The significant thing for other individuals and businesses who find themselves tangled in a spirited horse race with the IRS is not whether they are in the cutting horse business or whether or not they are in the seed business.  The significant points of this case are (a) the IRS holds a presumptive correctness in all tax deficiency matters, and (2) the taxpayer always bears the burden to prove that; more likely than not, they are entitled to the deductions claimed on their tax returns.  That means that the taxpayer must always maintain and produce credible substantiation of all items recorded on their tax returns.  This has been operative tax law governing IRS deficiency cases ever since the United States Supreme Court ruled on these two points in a pair of federal tax cases known as Welch v Helvering, 290 U.S. 111, 115 (1933) and New Colonial Ice Co., v. Helvering, 292 U.S. 435, 440 (1934).   Guy Tressillain Helvering, a Democrat from Kansas was the Commissioner of the Internal Revenue of the Bureau of Internal Revenue from 1933 to 1943.  This is the legacy agency of the Internal Revenue Service.  Today, typically tax cases are styled “Taxpayer v. Comm’r”.  Anyway, locks on doors are preparatory.  Folks put locks on their doors to prepare for when the thief comes.  The same way, taxpayer’s must collect, summarize, and maintain substantiation for all deductions claimed on their tax returns in the event the IRS examiner visits.  In the 2019 Besten case, we see the U.S. Tax Court applying the rules established in the 1930s.  In tax law and in law in general, predictability matters; there is little benefit of surprise, duplicity and uncertainty in law.  Taxpayers can prepare and comply with the law if they know the applicable law because federal tax law is not just about the horses.

 

Internal Revenue Code Section 6662 permits the IRS to assess a 20% accuracy penalty on tax deficiencies

Internal Revenue Code Section 6662 permits the IRS to assess a 20% accuracy penalty on tax deficiencies.  The accuracy-related penalties can be imposed by the IRS when tax deficiencies are due to the taxpayer’s negligence, recklessness or willful violations of the federal tax laws. In the Besten case, the taxpayer avoided paying the accuracy-related penalty because he was able to adequately convince the U.S. Tax Court that he acted reasonably and acted in good faith by relying on the professional advice of his tax professional.  This is often a viable defense for the taxpayer who can meet the burden that they (a) relied on the advice of their tax professional, (b) their tax professional was competent and experienced, and (c) they gave their tax professional accurate and complete information and documentation regarding the tax issue. So this particular reasonable cause defense (reliance of the tax professional’s advice and guidance), like the other reasonable cause defenses that might be applicable, depends on all the facts and circumstances because federal taxation and cutting horses is not just about the horses.  Reasonable cause defenses are not automatic relief; but like cutting horses, every reasonable defense should be explored when confronting additional taxes, penalties and interest, because cutting cost is another way of saving money.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

Federal Taxation of Old Age, Survivors and Disability Insurance Relief

By Coleman Jackson, Attorney, CPA
March 15, 2019

Federal Taxation of Old Age, Survivors and Disability Insurance Relief

 

Internal Revenue Code Section 3101 imposes on the income of every individual a federal tax equal to 6.2 percent of the wages received by the individual with respect to employment.  The Code also imposes a 1.45 percent hospital tax on every individual who receives wages regardless whether the wages are earned inside the United States or outside of the United States.  With the exception of corporations, trusts and estates, the Code imposes an additional .9 percent tax on wages received by individuals.  These tax assessments constitute employment or payroll taxes.

survivors

 

International Social Security Agreements between the United States and certain foreign countries could waive or relieve certain taxpayer citizens of foreign countries with agreements under Section 233 of the Social Security Administration Act.  These International Social Security Agreements are known as ‘totalization agreements’.   They are designed to give relief to workers who work overseas for part of their careers and pay social security related taxes to a foreign government.  Likewise totalization agreements are designed to give tax relief to temporary foreign workers in the United States who are required to pay into the U.S. Social Security System.  Totalization Agreements’ purpose is to limit old age, survivors and disability insurance type taxation to the country where the work was done.

 

disability

The intent of these internal social security agreements are clear; but, nevertheless,  tax disputes sometimes arise with respect to the nature or proper characterization of the taxation in the country with the totalization agreement.  These International Social Security Agreements cover social security related taxes.  It can be particularly vexing with respect to taxes enacted by the parties after enactment of the particular totalization agreement.   Are those later enacted taxes ‘social security ‘related or not?  The legal issues in these disputes, which sometimes are litigated in court, are whether the particular tax falls within the ambit of the totalization agreement or understanding of the parties.   Courts give great deference to the political views of the United States and the foreign government officials.  The totalizaiton agreement text is read in light of the official views of the respective government officials.  Taxpayers with old age, survivors and disability insurance taxation disputes covered under a totalization agreement should, if possible, seek help from respective government officials.  The actual text of the particular International Social Security Agreement is critical in resolving legal disputes.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432.