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No. of Recommendations: 38
...if you are not a pro.

Okay, some of you know that I'm a graduate student who enjoys doing taxes, reading about taxes, thinking about taxes, etc. And over the years I've learned a lot about taxes and I know for sure I'm in the "above average" category when it comes to knowing about taxes (which isn't saying much!), particulary because of the good folks here on this boards, and also because I like reading publication 17. ;)

Anyway, in school I get lots of questions from people who have never done taxes or don't really know what they are doing. For better or worse, I'm the "tax guy".

Well a fellow student in my lab has had a rough time. When I first met her a few years ago, she hadn't filed state or federal for 3 years because she didn't have the money. In fact, the first 2 years she didn't know she had to file at all. I convinced her to file for past years, and she got on a payment plan with the IRS and the state and she's moving on. Well, she's had a rough life, and it was made rougher when her 15 year old brother got expelled from school in NYC. He was sent to live with her, and her mom basically disowned him. My friend managed to obtain FULL legal custody, got him enrolled in a school in AL and is now basically a single "mother" at the age of 26, raising him solely on her meager stipend.

Well, she was QUITE happy to hear from me that she could now claim her brother as a dependent, file head of household, and get the child tax credit. That would basically leave her with zero tax due for 2004. This is good news for her, as she had been withholding properly for 2004; she'll get that back. I also informed her she'd probably get some EITC money. A couple of weeks ago I calculated she'd get almost $2000 on top of whatever withheld payments she'd get returned to her. She was elated, and I was glad to be the bearer of good news. I could see her paying her bills in her head. I told her to be ready to file as soon as her only necessary form (her W-2) came from the school.

Can anyone see where this is going?

Well, today I decided to carefully go through some info about the EITC. I was familiar with it, since I had helped other single mom grad students file and receive the EITC before. But uh oh. I had forgotten one TINY EENSIE WEENSIE detail. It had slipped my mind for good reason, because it had never come up. In order to qualify for the EITC, you need to be a US citizen. Resident aliens don't count. I knew that she had lived in the the US her whole life...but...I called her up. Turns out she was born in Jamaica and is NOT a US citizen. I hadn't thought to ask before. I told her the bad news. Poof! $2000 she was counting on down the drain.

It's my first tax "boo-boo" (well, not counting my personal taxes!), and I caught it before she filed or anything. But I had told her she'd qualify, and who knows, she might have already had "spent" that money based on what I had told her. So there were potential consequences. I feel really bad, and I should have gone through the EITC details before I told her she get any money.

But you know what I REALLY should have done? I should have printed her out the publications which dealt with the EITC, as well as links to info, and said "hey, look into this EITC thing and see if you may benefit, now that you have a dependent and your filing status has changed".

I think both of learned a very good lesson.

FFL
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<<<I think both of [us] learned a very good lesson.>>>

For my money, the best lesson in this (and thank you, by the way) is that the tax code is not transparent enough or simple enough for working American families. We need simplification, even if it means the tax system is "less efficient" according to those who theoretically understand it. Two families, identically situated, could end up paying different amounts of tax simply because one or the other happens to read the correct "publication". Just doesn't seem right.

My thoughts as I dread another round with Turbo Tax.

-Ak Steve
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(FFL:)"A couple of weeks ago I calculated she'd get almost $2000 on top of whatever withheld payments she'd get returned to her. She was elated, and I was glad to be the bearer of good news. I could see her paying her bills in her head. I told her to be ready to file as soon as her only necessary form (her W-2) came from the school.

Can anyone see where this is going?"

________________________________
Where I THOUGHT it was going, was that the IRS will likely offset any refunds due to your friend against her back taxes, which I think they will do, even though she has complied with the terms of her repayment plan. If she has mentally got her bills paid already, that could be a disappointment, though the IRS liability will be taken care of that much sooner.
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Turns out she was born in Jamaica and is NOT a US citizen. I hadn't thought to ask before. I told her the bad news. Poof! $2000 she was counting on down the drain.
_______________________________
Actually, that's more understandable to me. If you thought someone had lived here her whole life, why would you ask? And why would you think otherwise, unless she has a noticeable accent or something? Oh, that's right. You're in med. school. OK.

But seriously, I've seldom asked anyone if he/she was a citizen. And there aren't too many places in the tax code where it makes a difference. If a taxpayer is a U.S. RESIDENT, citizenship isn't usually too relevant.

Don't feel too bad. You helped out a friend, and getting her back on track with a payment plan was a good thing.

Bill
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Where I THOUGHT it was going, was that the IRS will likely offset any refunds due to your friend against her back taxes, which I think they will do, even though she has complied with the terms of her repayment plan.

Well, I DID tell her that's what would likely happen to any extra cash. They would have kept it and applied it towards her back taxes, which would have actually paid them all off. So she could have stopped her payment plan in addition to discontinuing any withholding.

But seriously, I've seldom asked anyone if he/she was a citizen. And there aren't too many places in the tax code where it makes a difference. If a taxpayer is a U.S. RESIDENT, citizenship isn't usually too relevant.

Exactly. I have helped loads of people who are not citizens, and are resident aliens, and basically the taxes come out the same unless there is a tax treaty (which I have also dug into and managed to help some folks who ARE subject to an easily understood treaty). So you are right, for tax purposes US resident alien = US citizen for almost all tax purposes. But not the EITC.

To be fair I DO tell everyone that my advice is worth what they are paying for (zero).

And I HAVE been able to "do good" bunches of times. There have been a few times where I've saved someone loads of cash, such as when a Norwegian neonatology fellow had his taxes professionally done after living in Norway for 6 months and the US for 6 months. He paid $400 to have his taxes done, and man, they looked really nice! He had his forms and worksheet printed out on heavy paper and bound in a nice binder. Impressive! But he was complaining that he sure had to pay a LOT in taxes and wasn't happy, and was having a hard time coming up with the cash. It turns out (and I forget the details, this was 3 years ago) that his preparer had not properly given him a credit for taxes already paid to Norway (or taxed the Norway income as US income or something like that). So we hastily re-did his taxes the right way, and it saved him $12,000. Note, I'm not ripping on professional tax preparers...just this particular one. Anyway, we redid his forms and he mailed them in himself. He said his preparer wouldn't give him a refund. :(

FFL
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In order to qualify for the EITC, you need to be a US citizen. Resident aliens don't count. I knew that she had lived in the the US her whole life...but...I called her up. Turns out she was born in Jamaica and is NOT a US citizen. I hadn't thought to ask before. I told her the bad news. Poof! $2000 she was counting on down the drain.

Why does the IRS have this information on its site?

To claim the EITC, individuals must meet the following rules:

Must have earned income (see our EITC Q&A)
Must have a valid Social Security Number
Investment income is limited $2,650
Filing status cannot be "married filing separately"
Generally must be a U.S. citizen or resident alien all year
Cannot be a qualifying child of another person
Cannot file Form 2555 or 2555-EZ (related to foreign earn income)

http://64.233.161.104/search?q=cache:JG2hNue7MigJ:www.irs.gov/individuals/article/0,,id%3D96456,00.html+eitc+eligibility+checklist&hl=en&ie=UTF-8

I don't know what this individual's circumstances are but if the only problem is that she is not a US citizen she might want to take another look at her elegibility. EITC Assistant.

http://www.irs.gov/newsroom/article/0,,id=129991,00.html




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I don't know what this individual's circumstances are but if the only problem is that she is not a US citizen she might want to take another look at her elegibility. EITC Assistant.

Interesting! You know, I DID the EITC assistant for her, and I think I may have misread the following sentence, by neglecting to see the distinction between NONresident and RESIDENT:

You cannot claim the earned income credit if you are a nonresident alien for any part of the year

Turns out she may be fine! Now I just need to find out if she has a SS# (pretty sure she does) and I know she meets all the other criteria.

Wow, I would have bet money that when I first did the EITC assistant it excluded nonresident aliens. Feeling rather foolish now.

At least the theme of my post still rings true, because either initially, or later, I gave my friend incorrect information. :)
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Now I just need to find out if she has a SS# (pretty sure she does) and I know she meets all the other criteria.

While you're checking, make sure that it's an SSN that's valid for employment. There's a pretty lengthy discussion in your beloved Pub 17. I don't recall (fascinating thread) whether she has a spouse or children, but valid SSN's are required for everyone involved.

Phil
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While you're checking, make sure that it's an SSN that's valid for employment.

Thanks for the tip!
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Turns out she may be fine!

Hope so. That's all that matters. :)

Looks like Phil is right. Remarkably tricky for kind of a basic provision. Hope it works out.

You Must Have a Valid Social Security Number (SSN)
Rule 2.

Social Security Number (SSN)
Valid SSN. To claim the EIC, you (and your spouse, if filing a joint return) must have a valid SSN issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC also must have a valid SSN. (See Rule 8 if you have a qualifying child.)

If your social security card (or your spouse's, if filing a joint return) says “Not valid for employment” and your SSN was issued so that you (or your spouse) could get a federally funded benefit, you cannot get the EIC. An example of a federally funded benefit is Medicaid. If you have a card with the legend “Not valid for employment” and your immigration status has changed so that you are now a U.S. citizen or permanent resident, ask the SSA for a new social security card without the legend. If you get the new card after you have already filed your return, you can file an amended return on Form 1040X, Amended U. S. Individual Income Tax Return, to claim the EIC.

U.S. citizen. If you were a U.S. citizen when you received your SSN, you have a valid SSN.

Valid for work only with INS authorization or DHS authorization. If your social security card reads “Valid for work only with INS authorization” or “Valid for work only with DHS authorization,” you have a valid SSN.

http://www.irs.gov/publications/p596/ch01.html#d0e498

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Also look at whether or not she has "earned income"! Taxable scholarships or fellowship grants that are not reported on a W-2 are not considered earned income for EIC purposes.

Good Luck!

t
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Any qualifying child listed on Schedule EIC also must have a valid SSN

Then it would seem that her brother would have to have a valid SSN also, wouldn't it?

Carol
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Also look at whether or not she has "earned income"! Taxable scholarships or fellowship grants that are not reported on a W-2 are not considered earned income for EIC purposes.

Yes, that has come up in the past. Most graduate students in my department have their stipend reported on a W-2. But SOME don't, based on the source of their funds, which can change from year to year. I.e. on year a student can be paid out of state funds (W-2 reportable) or federal funds (non-W2-reportable).

I first learned about the EITC was when a friend of mine, single mom with a 5 year old, won a prestigious grant during her third year in grad school that paid her tuition and stipend. The net result was no extra dollars in her pocket, but it's great for one's resume. HOWEVER, the school then paid her stipend from this grant (non-W2 income all of a sudden) instead of state funds. So she LOST the EITC (about $2700) she had been receiving for years. In addition, she lost her elegibility for federal student loans, since according to the formulas, 100% of her "need" was being met. It was a mess, and eventually she dropped out of the program. Now, it could be argued that the EITC was never intended to help pay for school, and rather is an encouragement to work. Is a scholarship "earned" income just because it's reported on a W-2? According to the EITC rules, it seems it is. But no FICA is due on our W2, taxable scholarship, which could allow one to argue it's not really earned income. But that's a discussion for another day perhaps.

FFL
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Remarkably tricky for kind of a basic provision.

It's all part of simplification.

Phil
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