Any change to the Earned Income Credit is big news for tax preparers who serve lower and middle income clients.
Changes to the Earned Income Credit change the amounts of tax refunds received by lower and middle income clients. Which, in turn, changes the way clients feel about us as tax professionals 🙂
A recent court case decision, Feigh vs. IRS Commissioner, changes the Earned Income Credit in a way that will increase tax refunds by thousands of dollars for many clients.
Bigger refunds = happier clients = happier tax pros, right?
Indeed, this new change to EIC can generate some great income for you as a tax preparer, if you take the actions.
However, as with all things IRS-related, we must be careful to follow the rules. This blog post is designed to give you some actionable insights into how this new Earned Income Credit change can help your clients–and you.
Medicaid Waver Payments Qualify for Earned Income Credit?
First, a bit of background…
By now most tax pros who deal with EIC claims are familiar with IRS Notice 2014-7, allowing certain Medicaid waiver payments to be excluded from income on tax returns.
Long story short, this “loophole” enabled certain taxpayers to avoid tax on W-2 income paid to them, when caring for a disabled person who lived in the same home as the taxpayer.
One common example of how this works:
A working mother of two young children, Donna, applies to care for her 85 year old mother, Beatrice, through California’s In-Home Supportive Services (IHSS), a social assistance program paid for via Medicaid.
IHSS accepts the claim and Donna receives a W-2 from IHSS for $8,000 for 2018.
Beatrice and Donna live together. And Donna’s tax professional knows about IRS Notice 2014-7. Because of IRS Notice 2014-7, Donna can exclude that $8,000 W-2 from taxation–“backing it out” on her Form 1040.
In order to clear time to care for her mother, Beatrice quit her second job in 2018, which was paying her that same $8,000 per year. This results in a decrease of Earned Income Credit on her 2018 tax return, as the $8,000 from IHSS–since it’s not taxable–does not qualify as earned income for purposes of claiming Earned Income Credit.
Donna’s Earned Income Credit was (rough numbers) $4,000 for 2017.
For 2018, her EIC drops to $800.
Her tax refund goes from $4,400 to…$800.
Although it was nice for some clients to exclude that income, it was not nice for other taxpayers, who no longer could claim the Earned Income Credit based on that income which was now non-taxable. You know, the whole “no double benefit” principle: if you’re not being taxed on the income, you can’t claim tax benefits related to that income. Right?
Well, that was what we thought was right…that’s what the IRS thought, too.
But now, a new court decision says that you can have your cake and eat it, too–certain taxpayers can both exclude Medicaid waiver income from taxation and use that same income to qualify for EIC.
Exclude Medicaid Waiver Payments from Tax and Claim EIC Based on Medicaid Waver Payment
Mary Feigh and Edward Feigh were two of the taxpayers negatively affected by the inability to use non-taxable Medicaid waiver payments as earned income for Earned Income Credit.
They sued the IRS and, on May 15th, they won.
What did they win, exactly?
They won the ability to both exclude Medicaid waiver payments from tax and use that very same income to qualify for Earned Income Credit.
Now keep in mind that extensive and sometimes complicated rules apply to Notice 2014-7 situations. Taxpayer must live with person being cared for, etc. It’s beyond the scope of this blog post to explain all those rules but suffice it to say that, as a tax professional, you need to make sure you conduct due diligence in this area.
Please do not just read this article and think, “Great! Let me claim EIC for all my 2014-7 clients, because Pronto said it’s OK.”
Overall, though, this is fantastic news for lower and middle income taxpayers and the tax preparers who serve them. The court decision opens up the possibility of filing amended returns to claim EIC based on Medicaid waiver payments.
For a comprehensive breakdown of the Earned Income Credit change court case, feel free to view this article from Kaplan Financial.
How Tax Preparers Can Capitalize on the New Earned Income Credit Change
If you serve lower and middle income taxpayers, you probably already have a few clients popping into your mind, who could benefit from this Earned Income Credit change.
I know at Pronto Income Tax we will be combing through our client files this month to see who qualifies and then contacting clients to give them the good news.
Filing amended returns, often for multiple years, creates a significant new earning opportunity for informed, proactive tax professionals.
We plan to deliver some training on how to help clients benefit from the new Feigh vs. Commissioner Earned Income Credit changes. Stay tuned there! It’s in the works.
For now, the steps I see are:
- Segmenting your database to see who’s now eligible for EIC (or more EIC) based on this change.
- Contacting eligible clients and “getting the go ahead” to do the work (agreement on price, timeline for completing work, process for getting clients the paperwork to mail out, etc.)
- Doing the work.
- Getting yourself paid.
This last part, about getting yourself paid, sounds especially sweet to tax professionals who are looking for income sources outside of tax season.
I ran some quick math on our database and see tens of thousands of dollars of new revenue, from reaching out to clients and doing this work for them.
If you’re looking to work with a tax education company that doesn’t just give you “information,” but actually provides you with insights you can use to help your clients better and enjoy a better tax career, connect with Pronto Tax School today.