Question

For many years, Loretta Johnson, a single mother of three children, has been struggling to make ends meet by working two jobs that barely pay the minimum wage and together provide just over $10,000. Fortunately, her housing and food costs have been partially subsidized through various government programs. In addition, she has been able to take advantage of the earned income credit, which has provided almost $3,000 annually to help her with living expenses. The credit truly has made a difference in the lives of Loretta and her family by helping them keep their creditors at bay. Loretta is proud that she has worked hard and provided for her family for many years without having to accept government assistance. Now, however, Loretta faces a problem as her children have grown up and moved out of her home. With no qualifying children in her household, she no longer qualifies for the earned income credit. Although she will continue working her two jobs, such a significant loss to her household budget cuts into her ability to be self-reliant. As a survival strategy and as a way of keeping the earned income credit, Loretta arranges to have one of her grandchildren live with her for just over six months every year. This enables almost 30 percent of her household budget to be secure. How do you react to Loretta’s tax strategy?

Answer 1

Loretta's tax strategy is as per rules and it will help her to take advantage of earned income credit.

Rules for a Qualifying Child are as follows

1. Relationship,
a child must be her Son, daughter, stepchild, foster child, or a descendant
of any of them (for example, your grandchild); - SO GRANDCHILD IS A QUALIFYING CHILD

2. Age - Child should be under age of 19, which her grandchild is

3. Residency - Child should live with her for more than half of the year. In this case she will keep her grandchild for just over six months

4. Joint return - Child cannot file joint return. here she is filing alone

As all the conditions are fulfilled she can claim earned income credit

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