Change Coming for Earned Income Tax Credit Calculation in 2011

Continuing with the articles I’ve been writing about the massive changes coming at the end of tax year 2010 (see this article as an index to all of the provisions that are changing), this time we turn our attention to the Earned Income Tax Credit (EITC) calculations, which are changing and will amount to a decrease in this benefit for some taxpayers.

Through 2010

The law today through the end of 2010 specifies that Earned Income includes only that income which is taxable when calculating the Earned Income Tax Credit.  As such, there are classes of “income” that are excluded, such as 401(k) deferrals and nontaxable combat pay, which is an electable choice (actually coming from the Heroes Act).

Beginning in 2011

Any income from employment, including self employment, is used in the calculation for EITC.  This includes those two items listed above, 401(k) deferrals and nontaxable combat pay.  The Earned Income Tax Credit is reduced as income increases, so adding more sources of income will have the effect of a reduction in this benefit for those folks that are eligible to take advantage of it.

And since this credit’s top end is a family income of $41,646, you quickly come to realize that reducing this benefit is impacting folks with already low incomes and children to support (in most cases).  Just another example of a tax increase that will take place with no effort by the present administration – if they choose to do nothing to rectify the situation.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author