The first few months of every new year seems to be dragged down by the necessity of preparing tax returns and the feeling of becoming poorer by the minute. To ease some of the federal burden, the IRS created an earned income tax credit that was implemented in 2013. California taxpayers, who are in a state where the tax burden is higher than average, were provided a state earned income tax credit starting with the 2015 tax year.
What Is the California Earned Income Tax Credit?
The Governor and Legislature of California, in a bid to relieve some of the tax burden on lower-income taxpayers, created an earned income tax credit (EITC) for the state of California to supplement the federal earned income tax credit. It was first implemented for the 2015 tax year.
The credit results in a direct dollar-for-dollar reduction in the amount of taxes owed, which is better than a deduction. Deductions only allow a taxpayer to reduce reported income and it may not result in actual tax savings. (It might, but you cannot count on it.)
How Does the California EITC Work?
According to the rules in California, you must have specific qualifications to be eligible for the tax credit:
- Your income must come from eligible sources: W-2 wages, salaries, tips, or other employee compensation subject to state withholding.
- Your maximum income level depends on how many qualifying children you have and your adjusted gross income and earned income.
- You must file as single, married/registered domestic partner filing jointly, or head of household.
Note that you cannot file as married/registered domestic partner filing separately.
Your adjusted gross income can be reduced to eligibility levels through business expenses and losses while any income from self-employment is not included in your adjusted gross income.
Here is a table of maximum income limits; it applies if both your adjusted gross income and earned income fall below the appropriate limit set according to the number of qualified children you can claim on your taxes.
Number of children
Maximum income limit
Two or more
Who Is Eligible for the California Earned Income Tax Credit?
As mentioned in the previous section, eligibility depends on the number of “qualifying” children in the household and the maximum income limit set forth by the state.
However, if you do not have a qualifying child, you and your spouse (if filing jointly) must be between 25 and 65 years of age at the end of the tax year to be eligible for the earned income tax credit in the state of California.
Furthermore, you must meet all of the following criteria:
- Your wages and adjusted gross income fall within the specified limits
- You, your spouse, and any qualifying children each have a Social Security Number issued to you by the Social Security Administration that is valid for employment
- You do not use the Married/Registered Domestic Partner Filing Separately designation when filing your taxes
- You live in California more than half the tax year
The definition of a “qualifying child” is determined by three criteria:
- The relationship of the child to the taxpayer
- The child’s principle residence during the tax year in question
- The age of the child
The child can be considered to be qualifying if it is the child, stepchild (by blood or adoption), foster child, sibling, or step-sibling, of the taxpayer, or a descendant of any of the designated family members.
Certain exceptions apply, but in general, the child must have had the same principle residence as the taxpayer for more than half the tax year. Also, the child must be younger than the taxpayer.
The child remains qualified is it is under the age of 19 at the end of the tax payer. The child can be up to 24 years old if it is a full-time student for at least five months of the tax year.
Any child who is permanently and totally disabled is qualified no matter the age.
That being said, the child only qualifies for one tax return, so if you and someone else can claim the child and you are filing separately, the qualified child can be claimed according to a hierarchy set out by the state. From most to least eligible, the following may claim the qualified child:
- The parent
- If more than one parent is a taxpayer filing separately, the claim goes to the parent with whom the child lived for the longest time during the tax year or, if time was equal, the claim goes to the parent with the highest adjusted gross income
- If no parent claims the child, an individual whose adjusted gross income exceeds the adjusted gross income of any eligible parent
If none of the child’s parents are taxpayers, the taxpayer with the highest adjusted gross income that is eligible to claim the child will be eligible for the earned income tax credit from the state.
A final caveat: your principle residence must have been in California for more than half the tax year.
How Much Is the Tax Credit Worth?
Again, it depends on the number of qualifying children you can claim and whether your adjusted gross income or earned income is below the maximum set by the state.
Referring the table above showing the maximum income and number of qualifying children claimed, you can expect the following state earned income tax credit for the tax year 2016:
- If you claim no children and earn up to $6,717, you may receive up to $217.
- If you claim one child and earn up to $10,087, you may receive up to $1,452.
- If you claim two children and earn up to $14,161, you may receive up to $2,406.
- If you claim three or more children and earn up to $14,161, you may receive up to $2,706.
In each case, your federal earned income tax credit will be higher.
How Do You Claim Your California Earned Income Tax Credit?
You must file a state tax return, even if you do not owe taxes. The tax credit will be paid as part of your refund. If you do owe taxes, the credit will reduce the amount of tax you owe and may result in a small refund.
Free assistance in claiming your tax credit is available at any of the free tax return preparation sites around the state up through Tax Day, which is Tuesday, April 18, 2017, for the tax year 2016.
If you are curious whether you are eligible or how much tax credit you may receive, you can go www.caleitc4me.org and use the online calculator. As always, we are happy to assist as well. Just contact us at Sam Brotman Law.