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How much should I send for a tax payment in order to receive the maximum in Earned Income Credit and Child Tax Credit?

Forum|Forum|1 year ago
September 25, 2024
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Hello, I am self employed with very low annual earnings ($5,000) Last year, I made a $300 payment to IRS for taxes so I would qualify for the earned income credit and child tax credit. I got a $2,072 refund. I am wondering if I should send a larger payment and if so how much, in order to get the maximum credit and refund for the EIC and CTC?

Thank you for your time.

Best answer by marctu

So, I would specifically discourage you strongly from making any payments to the IRS if your income is limited to Self-Employment income of $5,000. The reason is that both the Earned Income Tax Credit and the Child Tax Credit both require earned income, and not the payment of taxes, be it income or self-employment taxes.

The Earned Income Tax Credit (EITC) is a tax credit that may give you money back at tax time or lower the federal taxes you owe. You can claim the credit whether you’re single or married or have children or not. The main requirement is that you must earn money from a job or self-employment.

The credit can get rid of any federal tax you owe at tax time. If the EITC amount is more than what you owe in taxes, you get the money back in your tax refund. If you qualify for the credit, you can still get a refund even if you do not owe income tax.

See this article for more details: What is the Earned Income Credit? Find Out If You Qualify

The Child Tax Credit is determined by and phases in with one’s earnings: Anyone earning less than $2,500 annually is currently ineligible to claim the credit. Starting at $2,500 in earnings, the credit phases in at a 15% rate, meaning for every $100 earned above $2,500, a taxpayer receives $15 in CTC. For example, a taxpayer with $3,500 in earnings would receive $150 in CTC ($3,500 – $2,500 = $1,000; $1,000 * 15% = $150). A taxpayer with multiple children must phase in the credit amount one child at a time.

See this article for more details:2023 and 2024 Child Tax Credit

So, to summarize neither credit requires the payment of taxes. In effect, the $300 you paid was returned to you as part of the $2,072 refund. The refund most likely would have been $1,772 if you did not make the payment. Unless your self-employment is much higher in 2024, you should not make a payment as neither credit requires a tax payment to be made to qualify for the credits.

Thank you for the opportunity to answer your questions @Zitro

All the best,

Marc T.

TurboTax Live Tax Expert

KarenL4

Hi, Zitro,

The EITC and the CTC are calculated independently of how much money you pay in for self-employment taxes. You do have a requirement to pay in your federal taxes quarterly (including SE Taxes) if you will owe more than $1K (I am not addressing state requirements here). This article explains more. Eligibility for the EITC (which is a refundable credit-- which means you can get back more than you paid in taxes) is mostly based on family size and income and is discussed here. The CTC is a partially refundable credit and it's discussed here. Eligibility for the CTC has a number of factors.

Hope this helps!

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Regards,

Karen

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marctuAnswer

So, I would specifically discourage you strongly from making any payments to the IRS if your income is limited to Self-Employment income of $5,000. The reason is that both the Earned Income Tax Credit and the Child Tax Credit both require earned income, and not the payment of taxes, be it income or self-employment taxes.

The Earned Income Tax Credit (EITC) is a tax credit that may give you money back at tax time or lower the federal taxes you owe. You can claim the credit whether you’re single or married or have children or not. The main requirement is that you must earn money from a job or self-employment.

The credit can get rid of any federal tax you owe at tax time. If the EITC amount is more than what you owe in taxes, you get the money back in your tax refund. If you qualify for the credit, you can still get a refund even if you do not owe income tax.

See this article for more details: What is the Earned Income Credit? Find Out If You Qualify

The Child Tax Credit is determined by and phases in with one’s earnings: Anyone earning less than $2,500 annually is currently ineligible to claim the credit. Starting at $2,500 in earnings, the credit phases in at a 15% rate, meaning for every $100 earned above $2,500, a taxpayer receives $15 in CTC. For example, a taxpayer with $3,500 in earnings would receive $150 in CTC ($3,500 – $2,500 = $1,000; $1,000 * 15% = $150). A taxpayer with multiple children must phase in the credit amount one child at a time.

See this article for more details:2023 and 2024 Child Tax Credit

So, to summarize neither credit requires the payment of taxes. In effect, the $300 you paid was returned to you as part of the $2,072 refund. The refund most likely would have been $1,772 if you did not make the payment. Unless your self-employment is much higher in 2024, you should not make a payment as neither credit requires a tax payment to be made to qualify for the credits.

Thank you for the opportunity to answer your questions @Zitro

All the best,

Marc T.

TurboTax Live Tax Expert

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Z

ZitroAuthor

Thank you, this information is helpful. However, I found this not to be the case in 2022. I did not make any payments because my income was so low but then I was not eligible for either credit because I reported no earned income. Last year, when I made the $300 payment, I then got both credits. I guess I cannot claim an EIC or CTC if I do not report any income?

marctu

So to capture what you are following up on:

2022: $0 Earned Income = no Earned Income Tax Credit and no Child tax Credit

2023: $5,000 Earned Income and $300 Tax Payment = Tax Refund of $2,072 with the components of the refund being some Earned Income Credit and some Child Tax Credit. Also at $5,000 of self-employed income there is some self-employment tax paid as well.

The point is that the key to both credits is earned income not the payment of taxes. This is a which came first the chicken or the egg scenario here. I think you can make better use of the $300 during the course of the year rather then waiting for the $300 being returned to you when you file your tax return and then after the IRS processes the refund.

Thank you for the opportunity to answer your questions @Zitro

All the best,

Marc T.

TurboTax Live Tax Expert

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