Feature Articles: Taxes
Tax year 2012 – Tips for low-income families
Brenda Procter, M.S., Extension Associate Professor, and Graham McCaulley, M.A., Extension Associate, Personal Financial Planning, University of Missouri Extension
This article reviews some tax areas that may be of interest to low-income families, and highlights changes for the 2012 tax year.
Expanded Earned Income Tax Credit benefitsMany low-income families depend on the Earned Income Tax Credit (EITC), and the good news for this year is that the amount of the credit has been raised and more people are eligible for it. Specifically:
- Amount of credit increased. For 2012, the maximum
- $3,169 with one qualifying child
- $5,236 with two qualifying children
- $5,891 with three or more qualifying children
- $475 with no qualifying child
- Earned income amount increased. To be eligible for
a full or partial credit, the taxpayer must have earned income
of at least $1 but less than:
- $36,920 ($42,132 if Married Filing Jointly) with one qualifying child
- $41,952 ($47,162 if Married Filing Jointly) with two qualifying children
- $45,060 ($50,270 if Married Filing Jointly) with three or more qualifying children
- $13,980 ($19,190 if Married Filing Jointly) with no qualifying child
If you received unemployment compensation during this tax year, you will have to report the amount and possibly pay takes on any compensation received (all compensation received is taxable). Although individuals did not used to have to pay taxes on the first $2,400 of unemployment benefits, this is not the case anymore. Be sure to watch for Form 1099G, which will give your total unemployment compensation amount for 2012. This amount goes on Form 1040 line 19, Form 1040A line 13 or 1040EZ line 3. If you come to a Volunteer Income Tax Assistance (VITA) site, volunteer tax preparers will figure that for you.
There are a couple tax credits to help families with post-high school education expenses, and one of these credits (Lifetime Learning Credit) has increased the level of income at which you can claim the credit.
- American Opportunity Credit - This education tax credit (which has modified the Hope Credit), has been extended to be available through the 2017 tax year. The American Opportunity credit is available for the first four years of postsecondary education, such as college or vocational school, and it can be worth up to $2,500 per eligible student, per year. It does not apply to graduate and professional-level programs. Each student must be enrolled at least half-time for at least one academic period beginning during the year. You can claim 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. Forty percent of the credit is refundable for taxpayers, which means it comes to you whether you owe taxes or not (you could get up to $1,000 added to your refund). The threshold for the American Opportunity credit is phased out between a modified adjusted gross income of $80,000 to $90,000 ($160,000 to $180,000 if married, filing jointly).
- Lifetime Learning Credit - The lifetime learning credit helps parents and students pay for post-secondary education, and you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. The good thing about the Lifetime Learning Credit is there is no limit on the number of years the credit can be claimed. This may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree. Also, the modified gross income limits to claim the credit have been raised to $62,000 if single, head of household, or qualifying widow(er) widow(er) and $124,000 if married filing jointly. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000.
Health Coverage Tax Credit
The Health Coverage Tax Credit (HCTC) pays 72.5 percent of qualified health insurance premiums for eligible individuals and their families. Legislation has increased the amount of the HCTC and expanded who is eligible to receive it. The following provisions are effective until January 1, 2014:
- The tax percentage amount that the credit pays has increased from 65 percent to 72.5 percent.
- Participants who received the 65 percent tax credit through the monthly HCTC in any month from March – December 2011 are eligible to claim an additional 7.5 percent retroactive credit.
- There is now extended eligibility for qualified family members. For more information, review HCTC: Eligibility Requirements and How to Receive the HCTC on the IRS website.
Beware of Refund Anticipation Loans or instant refunds
Many tax preparation companies offer Refund Anticipation Loans (RALs). These are high-interest, short-term loans — much like a payday loan — and can cost you money in the long run. A recent study showed that most people who take out RALs think they are getting their refund early. This is not true and if your refund comes back lower than you expected, you still have to pay off the entire loan.
Although many large tax preparation companies are starting to get away from giving RALs, some smaller companies may still be doing this. Also, just because there are less RALs does not mean low-income tax filers are less vulnerable to excessive fees. Tax preparers and banks are now offering refund anticipation checks (RACs), which can be subject to significant add-on fees and may represent a high-cost loan of the tax preparation fee. Instead of getting a RAL or a RAC, try going to a Volunteer Income Tax Assistance (VITA) site or filing your taxes online. It only takes about seven days to receive a refund if you file through VITA or online!
Be careful with loaded debit cards
Some commercial tax preparers offer debit cards loaded with tax refund money. These cards look just like a credit card or bank debit card and often can be reloaded, but there is usually a cost — sometimes quite high. Beware of other hidden fees that could be attached. Some cards are more reasonable, but only you can decide if the convenience is worth the fees. Ask for a full disclosure of fees before agreeing to get your refund on a debit card. We recommend that if you need assistance in your tax preparation, you seek out a VITA site to receive free tax preparation and electronic filing services.
Volunteer Income Tax Assistance (VITA)
If you need help with your taxes, there are sites set up all over the state to provide free tax preparation assistance. Go online to http://extension.missouri.edu/hes/taxed/vitasites.htm for more information. This service is provided free of charge and the IRS-certified trained tax preparers can help make sure you get all the tax benefits and credits you have earned.
Last update: Monday, March 04, 2013