Earned Income Credit (EIC)

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The earned income credit, or EIC, is a refundable credit for workers who meet certain requirements and file a tax return. Persons with or without a qualifying child may claim the EIC. For tax year 2004, the maximum credit is $2,604 for persons with one qualifying child, and $4,300 for persons with two or more qualifying children. The maximum credit is $390 for persons without a qualifying child. The following questions and answers will help you determine whether you can claim the credit and, if so, how to calculate it.

Do you have earned income?

To claim the earned income credit, you must have earned income. For 2004, earned income includes all income from employment, but only if it is includable in gross income. Examples of earned income are wages, salaries, tips, and other taxable employee compensation. Earned income also includes net earnings from self-employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits. For tax years 2004 and 2005, members of the military who receive excludable combat zone compensation may elect to include it in earned income.

Do you have investment income?

If you have investment income of more than $2,650, you may not claim the EIC. Investment income includes taxable interest, tax exempt interest, dividend income, capital gain net income, certain income from rents or royalties, and certain income from passive activities. It does not include gains from selling business assets. For more information, refer to Publication 596, Earned Income Credit.

What is your filing status?

To claim the EIC, your filing status must be single, head of household, qualifying widow or widower, or married filing jointly. You cannot claim the EIC if your filing status is married filing separately.

Do you (and your spouse, if filing jointly) have a social security number?

You (and your spouse, if filing jointly) must each have a valid social security number issued by the Social Security Administration. Any qualifying child listed on Schedule EIC must also have a valid SSN. You cannot claim the EIC if you (or your spouse, if filing jointly) have a social security card that says "not valid for employment" and the number was issued so that the cardholder could receive a federally funded benefit, such as Medicaid. If you fail to provide a social security number for yourself (and your spouse, if filing jointly), the EIC will not be allowed.

Are you a qualifying child of another person?

If you (or your spouse, if filing jointly) are a qualifying child of another person, you cannot claim the EIC.

Do you have foreign earned income?

If you file Form 2555 (PDF), Foreign Earned Income, or Form 2555EZ (PDF), Foreign Earned Income Exclusion, you cannot claim the EIC.

Are you a nonresident alien?

If you are a nonresident alien, you can claim the EIC only if you are married to a United States citizen or resident, and you file a joint return and are taxed as a resident for all of 2004.

If you have a child, is your child a qualifying child?

To claim the EIC with a qualifying child, you must have one or more qualifying children. A qualifying child is a child who meets certain relationship, residency, and age requirements. To meet the relationship test, the child must be your:
  • Son, daughter, stepson, stepdaughter, or a descendant of any of them,
  • Brother, sister, stepbrother, stepsister, or a descendant of any of them, and you must care for this child as your own, or
  • Eligible foster child (a child placed with you by an authorized placement agency whom you care for as your own).

An adopted child (or a child placed with you for adoption by an authorized placement agency) is treated as a biological child.

To meet the residency test, the child must have lived with you in the United States for more than half the tax year. Military personnel stationed outside the United States on extended active duty are considered to live in the United States during that period for EIC purposes.

To meet the age test, the child must be under age 19 at the end of 2004, or under age 24 at the end of 2004 and a full-time student during any part of any 5 months during 2004, or any age if permanently and totally disabled. Refer to Publication 596 for exceptions to the time your child must have lived with you.

Does your child have a social security number?

Your qualifying child must have a valid social security number issued by the Social Security Administration. If your qualifying child does not have a social security number or if your child's social security card reads "not valid for employment" and the number was issued solely so that the child could receive a federally funded benefit, such as Medicaid, you cannot claim the EIC on the basis of that qualifying child. More information on social security numbers for purposes of the EIC can be found in Publication 596.

Is your child the qualifying child of another taxpayer?

For tax years 2002 and later, if two or more persons have the same qualifying child, they can choose which one will claim the credit using that child. If more than one actually claims the credit using the same qualifying child, only one will be entitled to claim the credit using that child, as follows:
  • The parents, if they file a joint return,
  • The parent, if only one of the persons is the child's parent,
  • The parent with whom the child lived the longest during the tax year, if two of the persons are parents of the child,
  • The parent with the highest AGI if the child lived with each parent for the same amount of time during the tax year, or
  • The person with the highest AGI, if none of the persons is the child's parent.

If you do not have a qualifying child?

To claim the EIC without a qualifying child, you must meet three additional requirements: age, dependency, and residency. To meet the age test, you (or your spouse, if filing jointly) must be at least age 25, but under age 65 at the end of 2004. You meet the dependency test if no one else can claim you (or your spouse, if filing jointly) as a dependent on their return. If someone else can claim you (or your spouse, if filing jointly) as a dependent, but does not, you still cannot claim the EIC. To meet the residency test, you (and your spouse, if filing jointly) must live in the United States for more than half the year. Military personnel stationed outside the United States on extended active duty are considered to live in the United States during that period for EIC purposes.

Do you meet the Earned Income and AGI Limit?

For 2004, to claim the EIC, your earned income and adjusted gross income (AGI) must be less than $11,490 ($12,490 if married filing a joint return) if you have no qualifying children, $30,338 ($31,338 if married filing a joint return) if you have one qualifying child, or $34,458 ($35,458 if married filing a joint return) if you have two or more qualifying children. AGI is the amount on line 36 (Form 1040 (PDF)), line 21(Form 1040A (PDF)), or line 4 (Form 1040EZ (PDF)).

How do you figure the EIC?

You must use Worksheet A or Worksheet B in the instructions for Forms 1040, 1040A, or 1040-EZ to figure this credit, or the IRS can figure the credit for you. If you want the IRS to figure the credit, carefully follow the steps in the instructions for your tax return or refer to Publication 596. This publication is also a valuable source for information on the earned income credit in general. If you file your return electronically, the credit will be figured for you. For more information about filing electronically, see e-file at the bottom of the irs.gov homepage.

What is advance EIC?

If you expect to qualify for the EIC in 2005, you may be able to receive part of it in advance during the year. To see if you qualify to receive advance EIC, refer to Advance Earned Income Credit.

Source: IRS.gov

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