Reference no: EM132659315

Problem - Holding on to the Earned Income Credit with the Aid of a Transient Child

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 a significant earned income credit. Although she will continue working her two jobs, such a significant loss to her house-hold 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?