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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

New Healthcare Tax Credit Should Help Small Businesses, Nonprofits

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

The Internal Revenue Service recently released some information to help companies take advantage of a tax credit provided by the health reform law.

The IRS estimates that about 4 million businesses qualify, and is sending out notices to as many as possible advising them of the tax break. If you haven’t received anything but believe your company may qualify, here’s what you should know:


The credit is available to companies with fewer than 25 employees with average wages of $50,000 or less. The full credit goes to companies with 10 or fewer employees and average annual wages of $25,000 or less. It is not available to self-employed individuals.

The credit covers 35 percent of an employer’s contribution to employee health premiums, so long as that doesn’t exceed 35 percent of the average cost of a health plan in the small group market. For a tax-exempt organization, the credit is 25 percent. Once the health exchanges are set up, the credit increases to 50 percent for businesses and 35 percent for nonprofits. At that time, the credit will only be available to companies purchasing insurance through the exchange.

A company can use the credit to reduce income tax owed and can carry the credit forward 20 years or back one year after 2010. Nonprofits can use the credit against withholding and Medicare taxes owed on behalf of their employees.

A key caveat is that employers must pay for half of the premium. For most workers, especially low-wage employees, a company that does not pay for at least half the premium is offering insurance that is essentially unaffordable. Even 50 percent is most likely not enough to do low-wage workers much good, especially at small companies where health care premiums are more expensive.

The amount of the credit is based on the premiums an employer pays for, so the more generous the coverage, the greater the credit. While premiums paid for owners and their families cannot be counted, those paid for seasonal workers can be. And the IRS has defined “premiums” broadly: not only does it cover premiums for standard medical insurance but it also applies to dental, long-term care and vision insurance-though again, an employer must pay 50 percent of each premium to count it toward the credit.

Calculating the credit probably requires any small employer to consult an accountant to see if the benefits are worth the cost of providing insurance. The tax credit is in effect, allowing employers who are already thinking about health insurance for their employees to factor in the savings as they plan ahead.

As an observer, I think the key issue is whether the credit is enough to offset the rising cost of health insurance. Those costs have hit small employers the hardest. We’ll see if the tax credit makes a difference in reversing the trend among small employers of dropping health insurance for their employees altogether.