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Are You Eligible For Michigan’s Earned Income Tax Credit?

by | Sep 2, 2021 | Michigan Taxation |

 

Most taxpayers are aware that the earned income credit (EIC) is one of the most valuable tax credits that can be claimed on their federal tax return.  For residents in the State of Michigan, did you know that there is an EIC available as a credit against your state income taxes?  If you qualify and have not been claiming this benefit, then you are potential leaving hundreds of dollars on the table.

A Michigan taxpayer is allowed to claim the state EIC as long as he or she was eligible to claim the federal EIC.  In order to determine if you are eligible for the federal EIC, you must satisfy the statutory rules under 26 U.S.C. §32. The following rules apply to EVERYONE:

  • RULE #1: AGI and Earned Income Limits – Your adjusted gross income (AGI) and earned income must both be below the maximum limit. The amount of the credit is gradually phased out as you approach the boundary and eliminated once the threshold is exceeded. The following limits apply for tax year 2021:
    • If you have NO qualifying children, your AGI and earned income limit for single, qualified widows or head of household filers is $15,980.00 ($21,920.00 if married filing jointly).
    • If you have ONE qualifying child, your AGI and earned income limit for single, qualified widows or head of household filers is $42,158.00 ($48,108.00 if married filing jointly).
    • If you have TWO qualifying children, your AGI and earned income limit for single, qualified widows or head of household filers is $47,915.00 ($53,865.00 if married filing jointly).
    • If you have THREE OR MORE qualifying children, your AGI and earned income limit for single, qualified widows or head of household filers is $51,464.00 ($57,414.00 if married filing jointly).
  • RULE #2: Valid SSN – You, your spouse (if married filing jointly) and every qualifying child must have a valid Social Security Number. 26 U.S.C. §32(c)(1)(E) & (F).
  • RULE #3: No Married Filing Separate Filing Status Allowed – However, if you are legally married and your spouse did not live in your household during the last six months of the tax year, you may be able to claim head of household status. 26 U.S.C. §32(d).
  • RULE #4: Citizenship and Residency – You and your spouse (if married filing jointly) must be a U.S. citizen or a resident alien during the entire tax year. If you were a nonresident alien for any part of the tax year, then you are not eligible for the credit. 26 U.S.C. §32(c)(1)(D).
  • RULE #5: No Foreign Income Exclusion – You cannot claim the earned income credit if you file Form 2555 – Foreign Earned Income or Form 2555EZ – Foreign Earned Income Exclusion for the tax year.
  • RULE #6: Investment Income Limit – Your investment income for the tax year cannot exceed $3,650.00. 26 U.S.C. §32(i).  Investment income includes income (unless derived in the ordinary course of a trade or business) from interest, ordinary dividends, annuities, royalties and individual retirement accounts (IRAs).
  • RULE #7: Earned Income Requirement – You must have earned income during the tax year to claim the EIC. This requirement is satisfied if you (or at least one spouse if married filing jointly) has income for the tax year derived from wages, salaries, tips, self-employment income, statutory employee income, nontaxable combat pay, union strike benefits or disability benefits before retirement age. 26 U.S.C. §32(c)(2).

There are additional rules that apply IF YOU HAVE A QUALIFYING CHILD:

  • RULE #8: Qualifying Child Test – Your qualifying child must be ALL of the following under 26 U.S.C. 152:
    • Relationship: Your qualifying child is your son, daughter, stepchild, foster child, adopted child, sibling (half- or step-) or a descendant of any of them. 26 U.S.C. §152(c)(2).
    • Age: Your qualifying child must be under age 19 at the end of the tax year (under age 24 if a student), must be younger than the taxpayer or spouse if filing jointly OR the qualifying child can be claimed at any age if he or she is permanently and totally disabled. 26 U.S.C. §152(c)(3).
    • Residency: Your qualifying child must have lived with you in the United States more than half of the tax year. 26 U.S.C. §152(c)(1)(B).
    • Joint Return: Your qualifying child cannot be filing a tax return for the tax year. 26 U.S.C. §152(c)(1)(E).
  • RULE #9: May Only Be Claimed By One Person – Only one taxpayer can claim the qualifying child (or a couple if married filing jointly) to take the EIC. In the event that several people are attempting to claim the same child for the purpose of federal taxes, the following tiebreaker rules are observed:
    • If only one of the claimants is the child’s parent, then the child is considered the qualifying child of the parent. 26 U.S.C. §152(c)(4)(A).
    • If the parents file a joint tax return and can claim the child as their qualifying child, then the child is considered the qualifying child of the parents. 26 U.S.C. §152(c)(4)(A).
    • If the parents do not file a joint tax return but both parents can claim the child as their qualifying child, then the child is considered the qualifying child of the parent who the child lived with for the longest period of time. If the child lived with both parents for equal time during the tax year, then the parent with the highest AGI can claim the child. 26 U.S.C. §152(c)(4)(B).
    • If no parent can claim the child as their qualifying child, then the child is considered the qualifying child of the person with the highest AGI. 26 U.S.C. §152(c)(4)(C).
    • If a parent can claim the child but fails to do so, then the child is considered the qualifying child of the person with the highest AGI IF that AGI is higher than either parent’s AGI. 26 U.S.C. §152(c)(4)(C).
  • RULE #10: Taxpayer Cannot Be Qualifying Child Of Another – If ALL of the criteria in Rule #8 apply to you with respect to another taxpayer, then you are his or her qualifying child and you may not claim the EIC UNLESS that taxpayer declines to file a federal tax return or only files a federal tax return for the purpose of getting a refund of income tax withheld or estimated tax paid. 26 U.S.C. §32(c)(1)(B).

There are additional rules that apply IF YOU DO NOT HAVE A QUALIFYING CHILD:

  • Rule #11: Must Be At Least 25 Years Old But Under 65 Years Old – If you are filing a joint return, either you or your spouse has to meet the requirement. It doesn’t matter which one as along as one spouse qualifies. 26 U.S.C. §32(c)(1)(a)(ii)(II).
  • Rule #12: Taxpayer Cannot Be Dependent Of Another – This rule applies even if the other taxpayer does not actually claim you on their federal tax return. 26 U.S.C. §32(c)(1)(a)(ii)(III).
  • Rule #13: Taxpayer Cannot Be Qualifying Child Of Another – If ALL of the criteria in Rule #8 apply to you with respect to another taxpayer, then you are his or her qualifying child and you may not claim the EIC. This rule applies even if the other taxpayer does not actually claim you on their federal tax return. 26 U.S.C. §32(c)(1)(B).
  • Rule #14: Residency in United States At Least Half Of Year – Your home (and your spouse’s home, if filing jointly) must be in the United States for more than half of the year. 26 U.S.C. §32(c)(1)(a)(ii)(I).

If you have satisfied the foregoing criteria, you may claim the federal earned income credit and the Michigan earned income credit.

In 2021, the maximum amount of federal earned income credit that can be claimed is as follows:

  • $543.00 if no qualifying children.
  • $3,618.00 if one qualifying child.
  • $5,980.00 if two qualifying children.
  • $6,728.00 if three or more qualifying children.

The amount of your Michigan earned income tax credit you are entitled to claim is equal to 6% of the federal income tax credit that you are allowed to claim.  MCL 206.272(1)(c). So if you are eligible to claim the maximum federal benefit of $6,728.00 with 3 qualifying children, then your Michigan EIC can be up to $403.00.

In addition, the Michigan earned income tax credit is 100% refundable like the federal earned income tax credit.  If the credit allowed exceeds the tax liability of the taxpayer for the tax year, the Michigan Department of the Treasury shall refund the excess to the taxpayer without interest.  MCL 206.272(2).  For example, if your Michigan tax liability is only $500.00 and your earned income credit is $600.00, then the state treasury must pay you the excess $100.00.  To claim the earned income credit, you must first calculate the amount of the federal EIC that you are entitled to and write that amount on Line 27a of Form MI-1040.  Next, you must multiply that amount by 0.06 (6%) and enter that amount on Line 27b.

If you have not claimed the Michigan earned income credit in the past, then you have four years from the due date of the original return (normally April 15) to claim an income tax refund by filing an amended return for that tax year.  Our tax professionals are available to assist you in filing a claim for refund.  Call the experienced attorneys at Kershaw, Vititoe & Jedinak PLC to get assistance with your Michigan tax needs today.

 

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