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According to a Reuters News Release, H&R Block and Jackson Hewitt Tax Service sales dropped this tax season. The largest tax service, H&R Block Inc. (NYSE: HRB) based in Kansas City, MO, US with offices in the US, Canada, Australia, and the United Kingdom, reported a 5% drop in the number of tax returns filed for the 2009 tax year.  The tax service giant and its chief competitor, Jackson Hewitt Tax Service (NYSE: JTX) located in Norfolk, VA, US continue to lose market shares to online software like Turbo Tax.  Jackson Hewitt, with over 5,000 franchises in the US, was founded by John Hewitt, a former Block employee, in 1982.  Turbo Tax is the tax preparation software product of Intuit Inc. (NASDAQ: INTU) headquartered in Mountain View, CA, US.

Making Work Pay Credit (MWPC) as noted in a previous blog post is a refundable credit available in 2009 and 2010 worth 6.2% of earned income up to $400 ($800, MFJ) for taxpayers with a valid for work social security number. You cannot be a dependent of another taxpayer or identified as a non-resident alien. If you receive earned income as an employee you more than likely began receiving this credit beginning in April, 2009 as a reduction in the amount of federal income tax withheld from your paycheck; though not large, an amount was proportionally reduced so that your net pay was greater than what it had been at the beginning of the calendar year. If you completed the IRS Form W-4 in 2009 using single withholding status, the total tax withholding for 2009 would have been reduced by $400 (those using a married withholding status, $600).

Form 1040, Schedule M, Making Work Pay and Government Retiree Credits, is a new form in 2009 that must be filed by eligible individuals claiming MWPC on Forms 1040 or 1040A. IRS Form 1040EZ filers enter MWPC directly on the 1040EZ form; they do not file the additional Schedule M. The MWPC is not considered taxable income by the Federal government. Similarly, it is not used in the determination of eligibility for federal program benefits or assistance.

The American Recovery and Reinvestment Act of 2009 (ARRA) was passed to help the US economy, with almost $800 billion in stimulus money, to recover from the recent financial crisis. Three provisions affect the average taxpayer in 2009; the Making Work Pay Credit (MWPC), the Economic Recovery Payment (ERP), and the Government Retiree Credit (GRC).

In brief:
Making Work Pay Credit (MWPC) is a refundable credit available in 2009 and 2010 worth 6.2% of earned income up to $400 ($800, MFJ). You are not eligible for this tax credit if you do not have a valid for work social security number, are a dependent or non-resident alien. When filing MFJ, only the taxpayer needs a valid social security number. Most taxpayers will have already received this “tax benefit” through the mid-year reduction in tax withholdings.

Economic Recovery Payment (ERP) is a one-time payment of $250 paid to retirees and those disabled who receive SSI, RRB (Railroad Retirement Benefits) Tier 1, and VA (Veterans Administration) pension or disability benefits. These latter individuals who received distributions in November or December 2008, or January 2009 will have already received ERP.

Government Retiree Credit (GRC) is a refundable credit of $250 ($500 if MFJ and both spouses are eligible) available in 2009 for retired government workers who do not receive social security benefits. A tax return must be filed to receive this payment; it reduces the MWPC.

Beginning January 1, 2009, the Internal Revenue Service has changed their Uniform Definition of a Child regulation. As of 2009, a qualifying child (QC) must be younger than the taxpayer except when the QC is totally and permanently disabled. You cannot claim a child as a QC if they file a joint return with another individual unless that tax return is a claim for refunding payroll withholdings. IRS Form 8901, Information on Qualifying Children Who Are Not Dependents, is, as of 2009, obsolete. Your child is a QC only if you can and do claim them as a tax exemption. Furthermore, rules for filing IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, have changed. A divorce decree or other court documents no longer serves as notification a custodial parent has released the child tax exemption to the non-custodial parent; the non-custodial parent must file IRS Form 8332 that has the signature of the custodial parent.

The 2009 Uniform Definition of Child Checklist:
• You must be older than your QC
• A child cannot be a QC if they file a tax return jointly with another individual for any reason OTHER than claiming a tax refund.
• Your child is a QC only if you can and do claim them on your return for the exemption.
• A person other than parents can claim a QC only if neither parent claims the QC and the non-parent’s AGI is higher than the highest AGI of either parent.

The Earned Income Tax Credit (EITC) is one of the few refundable tax credits available to the “average” tax payer. It is designed for the low-income individual by offsetting any income tax liability. It is important and, unfortunately, a target for fraudulent filings because any balance that remains after the tax liability is covered will be refunded to the tax payer. When a person supports dependents, the refundable credit can be significant.

To file for and receive EITC, you need:
• US citizenship (or year-long resident or non-resident alien married to a US citizen filing jointly) with a social security card valid for work
• Earned income from either employment or self-employment
• An IRS tax filing status other than Married Filing Separately (MFS)
• To have no one else able to claim you as a Qualifying Child (QC)

If you are claiming EITC and do not have a QC yourself, you need:
• To be at least 25 years old (but under 65 years old on December 31).
• Have lived in the US for more than 6 months.
• Not qualify as some one else’s dependent.

As of 2009, families with 3 or more qualified children will receive additional credit for the third child. The maximum EITC refunded is:
• $457 if you do not have a QC
• $3,043 if you have one QC
• $5,028 if you have two QC
• $5,657 if you have three or more QC

Maximum thresholds of earned income for EITC eligibility has increased in 2009 as follows:
• Below $13,440 ($18,440 if married filing jointly, MFS)
• Below $35,463 ($40, 463 if MFS) with one QC
• Below $40, 295 ($45,295 if MFS) with two QC
• Below $43,279 ($48,279 if MFS) with three or more QC