Earned Income Tax Credit mistake
In one of my first posts here at Gather Little by Little, I revealed that my personal finance history is not perfect. There have been some lessons that we had to learn the hard way . . . and there are certainly more lessons to come. I also said that I hoped to be honest with GLBL readers about our family financial journey. Today’s post is one such time that I thought about obscuring the truth a bit. I mean, it’s kind of embarrassing for a personal finance blogger to have a tax error, isn’t it? Here is the story:
In 2006, our family reached our financial low. A number of factors moved me to the point where I knew that I needed to do something drastic or we were going to fall off a financial precipice. We were not spendthrifts, we did not have loads of consumer debt, we were not facing a health emergency, but I could see that we were on the wrong path. I began to make some changes in our financial habits – most were good ideas – budgeting, using cash, got a better job, etc. However, a few strategies that we employed to generate extra cash resembled a “get rich quick” scheme more than “gathering money little by little” and at the end of this month, I will reap a bit of what I sowed.
Once I realized that we were headed for financial trouble, I became very proactive about our finances. I watched every penny like a hawk. I started to read personal finance blogs, most of which gave sound advice, however the first few blogs that I happened upon were “free money” blogs. Blogs that dealt with credit card bonuses, bank account bonuses and 0% balance transfer arbitrage. At the time, banks were throwing money around. Bank bonuses were everywhere and some were really large – especially when you qualify yourself for a bonus and then your wife qualifies for the same bonus and you double your money. I could go on all day about the various things that we did along these lines to generate extra cash. I’ll save the details for other posts. The bottom line is that we ended up with close to $80,000 of credit card balance transfer money in a couple of savings accounts along with approximately 35 different bank accounts and close to 40 new credit cards. We had earned close to $5,000 in free money! Looking back it sounds crazy, but at the time, I thought everyone was doing it . . .
Here was my mistake: when I filed my 2006 tax return, I claimed the Earned Income Tax Credit. The EITC is a tax credit for households who have children and earn less than a certain amount. Here are the basic rules to claim the EITC in tax year 2006:
- You have more than one qualifying child and your earned income was less than $36,348 ($38,348 if married filing jointly)
- You have one qualifying child and your earned income was less than $32,001 ($34,001 if married filing jointly)
- You do not have a qualifying child and your earned income was less than $12,120 ($14,120 if married filing jointly)
Under these rules, we qualified for the credit, but there is one more factor – our interest income had to be less than $2,800. This is where I made my mistake. Bank bonuses are considered interest income and we had also made quite a bit of money from the balance transfer arbitrage. As I read through the IRS literature, I became aware of the rule and began to add up all of our interest income from the previous year by using the 1099 forms provided by the various banks. The total that I arrived at was $2,753 which qualified us for the credit. Or so I thought.
This last May, I received an ominous looking envelope marked Internal Revenue Service. I opened it to discover that our interest income from that year was actually $2,813. I had missed $60 worth of referral bonuses from Virtual Bank. We have been given 60 days to pay what we owe, which happens to be the amount of the credit itself plus a little interest. If we pay the bill on time, we will not have to pay a penalty, thank goodness. I do not plan to contest the ruling, I made the mistake, there are no grounds for me to appeal. It just comes at a bad time for us . . . oh, well.
Here are some things that I plan to do differently going forward:
- Keep better records. I missed the bonuses in part because they were not entered in my spreadsheet.
- I also made the mistake because I added improperly – going to make sure next time.
- I doubt that I will ever chase bonuses to that extent ever again. My wife and I make sure that we get a bonus with every new account that we open, but we open the accounts because we need a new account, not because we need the bonus.
- I am going to take a little more care with my tax returns.
In case you are in a similar situation, here are the EITC interest income limits for the past few years:
- 2007 $2,900
- 2008 $2,950
- 2009 $3,100
Hopefully you never have to deal with the IRS and a tax mistake.
Photo by Stewart