October 16, 2018

Earned income credit

Refundable Tax Credits: They’re for Trust Fund Babies Too!

So 47% of our nation’s households will pay no federal income tax this year. Well, stick it to those rich people, then! Help the deserving poor, like Buffy Richgirl.

Buffy is a struggling 26-year single mom with three kids and a checkered romantic history. Yet she does the best she can, earning $16,500 in various jobs in 2009 while taking courses in applied tattoology at the local college, while Mom helps with the kids.

Let’s see how a beneficent tax law helps this struggling mom make ends meet.


Some key facts:

Name: Buffy Richgirl.

Age: 26

Filing status: Head of Household, because of 3 dependent kids – Biff, Cloyd and Muffy.

Income: $16,500, all salary, no withholding.

Housing status: Daddy gave her $200,000 in 2008 to buy a house, which she bought in December 2009. She formerly lived in various apartments or with Daddy.

Educational status: She’s taking tattoo technology courses half-time at the local college (her Mom helps out with the kids), where she ran up $3500 in qualified expenses.

Prospects: She’s the beneficiary of a trust from late Grandpa that will kick out $5 million when she hits age 30, but which distributes nothing right now.

Other cash sources: She gets occasional non-taxable child support, and she has a non-interest bearing checking account with some Daddy cash.

The tax results? Adjusted Gross Income: $16,500. Taxable Income: $0. Taxes withheld and paid: $0. Tax refund: $17,009.

So how did our heroine double her income via her 1040? Through the miracle of “refundable credits” – tax credits that generate a refund even if your tax computes to zero. She wins with:

• An $8,000 First-time homebuyer credit.
• A $5,634 earned income credit.
• $2,025 in additional child credits
• $950 refundable education credit.

Don’t believe me? Look at her 1040 for yourself:

So what’s the point? It’s very hard to fine-tune the tax law. That’s especially true with refundable tax credits. No matter how carefully you try to “target” a group with tax benefits, there will be collateral unjust enrichment.

Now don’t you feel better about that check you have to send IRS next week?

RICHGIRL_1040