Question

Diane is a single taxpayer who qualifies for the earned income credit. Diane has two qualifying children who are 3 and 5 years old. During 2019, Diane's wages are $18,900 and she receives dividend income of $900. Earned Income Credit Phase-Out Ranges Number of Qualifying Children Other than joint filers Joint filers Phaseout Begins Phaseout Ends Phaseout Begins Phaseout Ends None $8,650 $15,570 $14,450 $21,370 1 19,030 41,094 24,820 46,884 2 19,030 46,703 24,820 52,493 3 or more 19,030 50,162 24,820 55,952 Calculate Diane's earned income credit: ______

Diane's earned income credit is:
a) $0
b) $1,039
c) $2,830
d) $5,891

Answer 1

Without specific phase-out rates and maximum EITC amounts for 2019, an exact calculation of Diane's earned income tax credit is not possible. The EITC increases up to a certain income level, remains the same over a certain range, and then slowly decreases to mitigate the poverty trap effect. Specific information about phase-out ranges and maximum credits is required for an exact calculation.

Step-by-step explanation:

The earned income tax credit (EITC) is designed to assist low- to moderate-income working people and to encourage work. In the question, Diane has two qualifying children and earns wages of $18,900 with an additional $900 in dividend income. To calculate Diane's EITC, we must compare her income to phase-out ranges provided for taxpayers with two qualifying children. Diane’s wages are within the phase-out range; therefore, the credit amount will be less than the maximum credit for her situation and must be calculated considering the phase-out rules.

Unfortunately, the exact amount of the EITC cannot be determined from the information provided because the specific phase-out rates and maximum EITC amounts for the tax year in question (2019) were not supplied in the question. However, based on the information regarding phase-out from previous years provided in the question and by understanding the concept of the EITC phase-out, it can be deduced that the EITC is a credit that increases up to a certain income threshold, remains constant for a range of income, and then decreases slowly until it phases out entirely at a higher income level. This structure enables families to avoid the poverty trap where earning marginally more income results in an immediate and significant reduction in government support.