MAXIMIZING THE EARNED INCOME CREDIT

*MAXIMIZING THE EARNED INCOME TAX CREDIT (EIC)*
Low-income self-employed taxpayers often get a larger refund by increasing their income rather than reducing it.
As your income rises above zero the earned income increases up to a point, then begins to decrease until it is totally phased out at a certain level.

It is illegal to omit business expenses to increase your income in order to maximize the EIC. However, there is no reason not to choose an allowable alternative that will reduce a deduction such as car expense.

I have very few clients who qualify for the EIC but I did one the other day. One of the things they provided was the cost of gas, oil and repairs to a business vehicle. Also they gave me the mileage on the vehicle.
There is an option the IRS allows for most taxpayers in computing car expense:
You can use actual expense--but if you choose actual expense the first year you can't switch later.

You can use a standard mileage allowance and if you haven't used 'actual' the first year you can use the standard allowance the first year, then switch back and forth in future years. If you want to switch back and forth you must only use the straight-iine method for depreciation.

In almost all cases, the standard mileage allowance provides a larger deduction. So if the deduction is going to reduce or eliminate the EIC, then actual expense is the better choice.

I wrote this blog using Google Documents and spreadsheets. You can also see it by going to this link to the document: http://docs.google.com/View?docid=dch9s27g_2cjzcn2

REFERENCES –KEY ITEMS:
WHERE TO FILE: http://www.irs.gov/file/index.html
RESTORED DEDUCIONS for Sales Tax
http://www.irs.gov//pub/irs-pdf/p600.pdf

PUBLICATION 17, Your Federal Income Tax - This publication is a reference book covering most subjects involved in preparing Form 1040 http://www.irs.gov/pub/irs-pdf/p17.pdf
LIFE EVENTS AFFECTING TAXES http://www.irs.gov/individuals/article/0,,id=121557,00.html

OTHER FORMS AND PUBLICATIONS:
Car Expense-- Pub 334,463 and 535
Sale of Principal Residence-- Pubs 523 and IRC § 121
Sec 179 write-offs for SUVs and other equipment-- Form 4562, Pub 946, IRC §167
Office in Home--- Form 8829, Pub 587
Mutual Fund -- phantom profits, reinvested dividends:-- Pub 550 and 564
Alternative Minimum Tax --- Pub 929 (individuals) Pub 542 (corporations)
Link to IRS forms and publications:http://www.irs.gov/formspubs/index.html
Link to IRS Section No. http://www.taxalmanac.org/index.php/Internal_Revenue_Code
To subscribe to IRS Newswire http://www.irs.gov/newsroom/content/0,,id=103381,00.html
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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.