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.
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?