Written by Dspeakes
The general rule of thumb for taxes is that the more you make, the more taxes you pay. So most people have a natural instinct to try to minimize the income on their tax return.
Some people don’t have another job; mystery shopping is all they do. Maybe they have Social Security income (usually non-taxable) and they mystery shop (or have some other small business they engage in) for extra income. But they despair of paying taxes on it.
Before you start hunting under the sofa cushions for imaginary deductions you can add to the tax return, learn about the Earned Income Credit – especially if you have dependent children.
Someone earning $5,000 in net business income can expect to pay 15.4% of that in SE taxes. So they may try to reduce that any way they can. But reducing that may actually cost them more in taxes.
A single person making $5000 in earned income (with no other taxable income on the return) will get an Earned income credit of $384 and will pay $770 in SE tax. So the EIC basically pays about half the SE tax for you, just as an employer would if you were employed. But the EIC for single people phases out at around $10,000.
But if you have dependent children under 19 years old, the effect is dramatic.
That same $5000 in earnings will yield an EIC of $1709 for a single or married person with one child, more than wiping out the $770 in SE tax. With two children it is $2010 and with three or more children, the EIC is $2261. Bump that income to $10,000 and those amounts are $3250, $4010, and $4511 versus $1540 in SE tax. It phases out at about $37,000 with one child and about $46,000 with three or more.
This is a refundable tax credit; once you have wiped out any tax bill you owe, the IRS will send the rest to you. Oh, and you will also likely qualify for the $1000 child tax credit if those children are under 18.
So what this means is that if you have children, there is a window of opportunity where the more you make, the less tax you will pay. Many low-income families end up with large refunds of taxes they never paid in.
Now before you decide, “Well, I just won’t write off my mileage so I can get a piece of that!” let me warn you that you must declare all your business expenses; falsifying an income to increase a tax credit is just as illegal as not declaring an income. What this does mean is you can make some wise choices about your deductions to help increase your earned income.
Examples of things you can legally control:
Depreciation. Let’s say you bought a $400 printer. You can choose to depreciate that by taking a Sec 179 deduction, writing off the entire $400 in one year, or by using the MACRS method, or the straight-line method. Straight line will spread that $400 over 5 or 6 years, so you would only take $40 or $80 the first year, which reduces your deductions, increasing your income. You’ll deduct the rest in future years.
Mileage. Our mileage computations can be tricky. If you have a home office, you can take mileage door to door. If you don’t, you could take mileage only from your first stop of the day to your last stop of the day. If you run personal errands while shopping, you can decide if you did a business stop on a personal trip or did a personal errand on a business trip. I personally calculate based on “was I going there anyway?” and only deduct the additional miles I added to the trip to get to the mystery shops. Any method, used consistently, will be fine with the IRS. Your outcomes may vary greatly. Choose what works best with your tax situation.
Home office. You don’t have to take a home office deduction, even if you qualify.
Delay or accelerate purchases. If you have a big income and need it to be smaller, buy that new computer this year. If your income is within the EIC range, calculate whether it helps you or not to buy it this year or next year. Don’t do this analysis on December 31. To deduct a depreciable item, you need to put it into service during the tax year. So ordering it on Amazon on December 31 won’t help you because it won’t get there until January.
Keep in mind, your money from mystery shopping is taxable in the year you receive it. Your deductions are deductible in the year you pay them. So you can deduct amounts paid out in 2014 on your 2014 tax return, and include the reimbursement you don’t get until 2015 as income on your 2015 tax return.
The EIC starts low, increases as your income goes up, peaks, then declines until it is phased out. So figure out where your income falls – on the up slope or the down slope – and see what you can do to get closer to that lucrative peak, which is different depending on marital status and the number of children.
Now that I have intrigued you – talk to your own tax preparer about this, because this is just a sneak peek at how this works, and your entire tax situation will come into play. Few of us only mystery shop; most of us have other income as well, and that will have an effect on these calculations.
Just keep in mind that sometimes more income can result in less taxes paid, and see what you can do – legally of course – to take advantage of this lucrative credit.
Dspeakes is an IRS Registered Tax Return Preparer and has been preparing taxes for over 18 years. But please consult your own tax preparer. This is generic information that only applies for people who qualify for the credit, and not everybody does.