EIC for new retiree?

[Kea]

Client retired in early 2011. Earned approx $9000. Massive stock / futures / puts & calls losses of over $15K. Spouse had about $5000 in babysitting income (not run like a business -- just helping out neighbors).

Is there some reason this would not qualify for EIC?

[Lynn EA USTCP in Louisiana]

How old are these taxpayers. If both are age 65, or older, they will not qualify for EIC. Nor will they qualify if they have interest or dividends above a certain amount.

Lynn Jacobs, EA

Cicil Law Notary Public

Kenner, LA

[Kea]

They are in their late 50s. Lots of short term stock(etc) sales, but no interest / dividends.

[jainen]

>>not run like a business -- just helping out neighbors<<

That's not an easy position to take. They depend on her income for more than a third of their earnings, and it obviously represents an ongoing activity to generate a profit. If you are trying to dodge SE tax (several times any potential EIC), you should document the not-for-profit factors. There's a good chance you'll get to use those records.

[Kea]

I didn't consider the % of total income. This is a new client this year and they presented the info as a businsess. When I started asking the questions, it sounded like more of a hobby to me. No, I wasn't try to avoid SE tax - just trying to determine which it was.

Based on the trades they are making, it appears that they already have assets (although the statement does not show their balance). One of the short term trades was for over $200K. So I'm not sure they are particularly relying on the wife's babysitting income. This is not the kind of family I think of for EIC, but the income and other factors seem to fit.

I don't remember seeing any limitation of EIC based on net worth, but perhaps I missed it. Granted, large net worth might typically generate interest and dividends high enough to disqualify EIC. But it appears that in this case everything is being traded and not sitting somewhere generating investment income. It is generating capital losses this year and there was the $15K carry over from 2010.

[jainen]

>>they presented the info as a businsess<<

Why are you pushing these IRS red flags on a family that already has so many problems? They're juggling hundreds of thousands, and you're bugging them about hundreds of ones.

[Kea]

I haven't bugged them about anything. I've just asking my standard questions - I never told them I was leaning towards listing the babysitting as a hobby. I'm just trying to figure out if I should ask them the EIC questions. Before I go there, I want to make sure I'm not missing something about not qualifying for net worth or other reasons related to their investments.

Everything has been conducted by e-mail so far.

[kcjenkins]

Yes, it is possible that they may qualify for EIC this year, just do the worksheet and be sure you have their DOB info in the return, and you should be fine. The software will apply the tests, if you answer the questions. As for the babysitting, even if it's just neighbor kids, that does not make it not a business. You do not have to advertise and be open as a daycare to call it a business. The fact that she is charging for her time is the basic element of a business. Whether they are dependant on the income is not crucial, as long as she is charging them a reasonable rate.

[Kea]

Thanks so much KC. I'm glad I wasn't missing something on EIC. I don't want to get any of the rules wrong - but EIC errors can be even worse.

It's just not a situation I thought about for EIC.

[kcjenkins]

I'd just be happy that one of the people who normally PAYS taxes gets the credit, for a change.

[joanmcq]

I've had a few of those; circumstances changed and the taxpayer qualified for a year or so. For one of them it was a godsend since she was self-employed (realtor) and had moved to CA after divorce. She hadn't made estimated payments, and the EIC covered her SE tax. Happy ending; biz boomed, kid grew up and she remarried and they are doing quite well. But that one year kept her from having a tax debt at a bad time in her life.

Most of the EIC clients I've had have been single parents-making ok money like $25-30k with one kid. Ok money if you are single with no kids and starting on your career that is. But then again, I'm a firm believer in birth control!