See below an interesting story by member Bob Mull, our VITA (Volunteer Income Tax Assistance) Program lead:
This is in the way of sharing what the world of tax preparation is like these days. My very first return was indicative of why we in Rotary support the VITA tax program. Here is the situation:
Single mom, has one daughter
-Adopted 2 foster children in 2021.
-Two wage statements, one for $2,000 and one for $33,000 for total “earned” income of about $ 35,000.
-Filed as “Head of Household”, which provides a standard deduction of $18,800, leaving taxable income of $16,200, and a federal income tax of $1,650 as she is in the 12% bracket. She put money into her 401k, so she realized a tax offset of $180 for the Retirement Savings Credit, so her net income tax is $1,470. She had withholding of $300, so net of this, her tax owed is $1,170.
Now for the offsetting good news for her:
-Her Earned Income Tax Credit (EITC) is $3,500. All 3 children count as qualifying children for the calculation of this credit.
-Her oldest child was in her tax return last year, so for 2021, she is eligible to get $3,000 of Child Tax Credit, with 1/2 received in 5 $300 monthly payments from August through December, and the remaining $ 1,500 as part of this tax return.
-For her 2 adopted children, as she adopted them in 2021, she gets $3,000 of Child Tax Credit for each. So the total Child Tax Credit is $7,500.
-For the 2021 Stimulus Payment of $1,400 per person in the household, the taxpayer received $2,800 early in 2021 for herself and her daughter. With 2 more members of the household in the 2021 tax return, she receives $1,400 for each for $2,800 additional refund.
Adding all of this up, she gets a federal refund of $12,630. This is 36 % of her gross income!!
More good news comes in her Michigan Income Tax Return:
-Michigan has a $4,900 exemption for each member of the household—taxpayer and dependents, so that is a $ 19,600 exemption.
-As her Adjusted Gross Income from the federal return is $ 35,000, this leaves taxable MI income of $15,400. This is taxed at 4.25%, so she has a MI tax of $654.
-Now for the offsets. MI pays a refundable credit of 6% of the federal EITC, or for our taxpayer, $210. She had MI withholding of $430.
-She owns her own home and is eligible the the Homestead Property Tax Credit (HPC). This calculation generates a credit of $975.
-Adding all of this up, the $654 tax offset by the EITC, withholding, and the HPC, nets a refund of $961.
Her total federal and state refunds add up to $13,591. Subtracting her own withholding of $730, her net refundable amount is $12,861. This is like a 37% boost to her income. We need to call this something other than a tax return. Maybe an income reconciliation would be a better term.
