This tips page is an important part of the Taxpayer Advocate’s mission to engage with both taxpayers and tax professionals to identify systemic problems or processes in working with DOR. Tips will focus on common questions or areas of confusion and are meant to help taxpayers and tax professionals better understand both their responsibilities and their rights.
Earned Income Tax Credit (EITC)
One of the key work incentives for individuals and families who earned $51,567 or less last year is the Earned Income Tax Credit (EITC) which allows low and moderate income workers to keep more of what they earn. It’s also the federal and MA refundable tax credit that is most often missed. The IRS estimates that four out of five eligible workers and families get the credit, but millions who could claim it don’t.
Last year more than 27 million workers and families received more than $63 billion in EITC. In Massachusetts, which gives taxpayers who qualify for the federal EITC, 15% of what they received from the federal amount, 425,000 workers claimed the state EITC and received $125.5 million or around $295 per filer.
The amount of EITC varies depending on filing status, income and family size. The IRS has an online EITC calculator www.irs.gov/eitc to help taxpayers and tax preparers determine if they are eligible and estimate their EITC. The refund can range from up to $487 for workers without children (including the self-employed and farmers) and a maximum credit of up to $6,044 for those with three or more qualifying children. Even if a taxpayer didn’t qualify last year for EITC, they should always check their eligibility, especially if personal circumstances have changed.
To get the federal EITC you must file a tax return even if you are not otherwise required to file a return or do not owe any tax. Once a taxpayer gets the amount of the federal EITC they can enter it on line 40 on the Massachusetts state return and multiply by 15%. Taxpayers filing for MA EITC must also include Schedule DI which lists information on qualifying children.
Even if the EITC claim is prepared by a tax preparer, taxpayers are still responsible for the accuracy of the return. Beware of any scams that claim taxpayers don’t need documentation to back up the claim or promises they can increase the amount of the EITC. Scams that create fictitious qualifying children or adjust income levels to get the maximum EITC could leave taxpayers with a penalty.
Every year, the Massachusetts Department of Revenue asks selected taxpayers to verify the EITC claim by requesting such documents as social security cards for qualifying children, receipts, bank account statements and cancelled checks and expense sheets for taxpayers who may be self-employed. All information is then shared with the IRS to be sure that only those workers who are eligible get the credit and the right amount of the refund.
So be sure to claim the EITC if you’re entitled to it, but keep good records to verify your claim.
Buying a Vehicle out of State?
If you are a Massachusetts resident who is spending time in Florida this winter, be aware of this Massachusetts sales tax provision if you happen to buy a new vehicle while out of state.
Under Massachusetts law, when you trade in your vehicle towards the purchase of another vehicle, the trade in allowance is deducted from the final purchase price before the sales tax is calculated at the Registry of Motor Vehicles. However, only vendors registered with the Massachusetts Department of Revenue are allowed the trade-in allowance.
What does this mean? Well, let’s say you purchase a vehicle for $30,000 and the dealer gives you $10,000 in trade-in allowance. If the dealer is registered with DOR you would pay $1,250 in Massachusetts sale tax when you register the vehicle after returning to the state. If the dealer isn’t registered than you would owe $1,875 as the sales tax would be calculated on the full price.
Fortunately, registration is only a click away on www.mass.gov/dor so the dealer can easily sign up and there are no fees to register. So before you buy, ask the dealership if they are registered with DOR and don’t get caught paying more sales tax than is necessary.
Employee Business Expense Reviews
Tax practitioners, taxpayers and tax return preparers often contact me with questions about DOR’s employee business expense project. Over the last several years, DOR has used automated programs to flag returns that may require further review which generates a form letter to the taxpayer requesting more back-up information on employee business expenses.
Here’s what to expect if you get such a notice of an audit review. First, for background, download IRS Publication 463 which gives detailed explanations for employee business deductions and what records taxpayers are required to substantiate the claimed expenses. (It’s always a good idea to review this publication at the start of every tax year for tax planning purposes.)
Second, respond to the letter by mailing the requested documentation to the DOR. If you need more time to put together your response, you must contact the Department of Revenue at the number listed on your notice. If you ignore the letter, remember the clock is ticking and additional tax plus penalty and interest will be due if the expenses are disallowed.
Documents that prove travel, lodging, entertainment or transportation expenses should be quite detailed, listing the amount, time, place and business purpose of each expense. Expenses must be logged as they are incurred. Records for mileage expenses must include a mileage log with the date, beginning and ending odometer readings, locations, the name of the person or business you met with, as well as the business purpose of the meeting. Additionally, taxpayers who claim employee business expenses will be asked to submit the written reimbursement policy issued by their employer. Taxpayers who can be reimbursed for employee expenses by their company but choose not to submit claims cannot then claim these expenses on their federal or state tax returns.
For Massachusetts tax purposes, remember that for many employees, only expenses for travel, meals and lodging while away from home or main place of business are allowed. Outside salespersons are allowed these expenses plus all federally deductible unreimbursed employee business expenses. (See Directive 89-1: Directive 89-1: Employee Business Expenses).
So before you deduct employee business expenses on Schedule Y of your individual Massachusetts income tax return make sure you can back up your claims with the necessary documentation that’s required. This will save you time and money should your tax return be selected for review.
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