This part of the chapter discusses Rules 1 through 6 . You must meet all six rules to qualify for the earned income credit. If you do not meet all six rules, you cannot get the credit and you do not need to read the rest of the chapter.
If you meet all six rules in this part, then read either Part B or Part C (whichever applies) for more rules you must meet.
Rule 1. You Must Have a Valid Social Security Number (SSN)
To claim the earned income credit, you must have a valid SSN for you and your spouse (if filing a joint return), and any qualifying child. (See Rule 7 if you have a qualifying child.)
A valid SSN is one that allows you to work. SSNs are issued by the Social Security Administration. Most SSNs are issued to U.S. citizens or to persons who have permission from the Immigration and Naturalization Service to work in the United States. Some SSNs are issued only for use in applying for or receiving federally funded benefits. You can claim the EIC only if you have an SSN that allows you to work. If your social security card says "Not valid for employment," you cannot get the EIC.
U. S. citizen.
If you were a U. S. citizen when you received your SSN, you have a valid SSN.
If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC.
Other taxpayer identification number.
You cannot get the EIC if, instead of an SSN, you (or your spouse if filing a joint return) have an individual taxpayer identification number (ITIN). ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN.
If you do not have a valid SSN that allows you to work, put "No"
directly to the right of line 60a (Form 1040), line 38a (Form 1040A), or to the right of the word "below" on line 8b (Form 1040EZ). You cannot claim the EIC.
Getting an SSN.
If you (or your spouse if filing a joint return) do not have an SSN, you can apply for one by filing Form SS-5, Application for a Social Security Card, with the Social Security Administration.
Filing deadline approaching and still no SSN.
If the filing deadline is approaching and you still do not have an SSN, you have two choices.
- Request an automatic 4-month extension of time to file your return. You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or by paying at least part of any tax you owe by credit card or direct debit. Getting an extension does not give you extra time to pay any tax owed. You should pay any amount you expect to owe to avoid interest or penalty charges. For more information, see the instructions for Form 4868.
- File the return on time without claiming the EIC. After receiving the SSN, file an amended return ( Form 1040X, Amended U.S. Individual Income Tax Return ) claiming the EIC. Attach a filled-in Schedule EIC if you have a qualifying child.
Rule 2. Your Filing Status Cannot Be Married Filing Separately
If you are married, you usually must file a joint return to claim the EIC. Your filing status cannot be "Married filing separately."
Spouse did not live with you.
If you are married and your spouse did not live in your home at any time during the last 6 months of the year, you may be able to file as head of household, instead of married filing separately. In that case, you may be able to claim the EIC. For detailed information about filing as head of household, see chapter 2.
Rule 3. You Must Be a U. S. Citizen or Resident Alien All Year
You cannot claim the earned income credit if you are a nonresident alien for any part of the year, unless:
- You are married to a U.S. citizen or a resident alien, and
- You choose to be treated as a resident for all of 2000 by filing a joint return. If you need more information on making this choice, get Publication 519, U.S. Tax Guide for Aliens.
If you make the choice in (2) above, you and your spouse are taxed on your worldwide income. You cannot claim any tax treaty benefits as a resident of a foreign country during a tax year in which the choice is in effect.
Rule 4. You Cannot File Form 2555 or Form 2555-EZ
You cannot claim the earned income credit if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. U. S. possessions are not foreign countries. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more detailed information.
Rule 5. Your Investment Income Must Be $2,400 or Less
You cannot claim the earned income credit unless your investment income is $2,400 or less. If your investment income is more than $2,400, you cannot claim the credit. For most people, investment income is the total of the following amounts.
- Taxable interest (line 8a of Form 1040 or 1040A).
- Tax-exempt interest (line 8b of Form 1040 or 1040A).
- Dividend income (line 9 of Form 1040 or 1040A).
- Capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form 1040A).
However, if you are reporting income from the rental of personal property on Form 1040, line 21, or are filing Schedule E (Form 1040), or Form 8814, or are reporting a gain on Form 4797, see Rule 5
in chapter 1 of Publication 596 for more information.
Rule 6. You Must Have Earned Income
This credit is called the "earned income credit" because, to qualify, you must work and have earned income. If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. Earned income includes all the income you get from working--even if it is not taxable.
Taxable Earned Income
Taxable earned income includes:
- Wages, salaries, and tips,
- Net earnings from self-employment, and
- Gross income received as a statutory employee.
For some examples of items that are included or not included in earned income, see Table 37-2, later. Some of the items listed are discussed in more detail later.
Wages, salaries, and tips.
Wages, salaries, and tips you receive for working are reported to you on Form W-2, box 1. You should report these on line 1 (Form 1040EZ) or line 7 (Forms 1040A and 1040).
If you were a household employee who did not receive a Form W-2 because your employer paid you less than $1,200 in 2000, be sure to include the amount you were paid on line 7 (Form 1040 or 1040A) or line 1 (Form 1040EZ).
Self-employed persons and statutory employees.
If you are self-employed or received income as a statutory employee, you must use Form 1040 or Publication 596 to see if you qualify to get the EIC and to figure the amount of the EIC.
Nontaxable Earned Income
This includes anything of value (money, goods, or services) that is not taxable that you received from your employer for your work. Common types of nontaxable earned income are listed in the following paragraphs.
Salary deferrals and reductions.
- Salary deferrals. These are contributions from your pay to certain retirement plans (such as a 401(k) plan or the Federal Thrift Savings Plan). These amounts are shown in box 13 of your Form W-2. The "Deferred compensation" box (box 15) of your Form W-2 should be checked.
- Salary reductions, such as under a cafeteria plan, unless they are included in box 1 of your Form W-2. A cafeteria plan is a benefit plan offered by your employer that allows you to choose among two or more benefits consisting of cash and benefits that are not taxed. If you choose a benefit that is not taxed (such as accident and health insurance), the amount of the salary reduction is nontaxable earned income when figuring the EIC.
- Mandatory contributions to a state or local retirement plan.
Meals and lodging.
- Military employee basic housing and subsistence allowances, the value of in-kind housing and subsistence, and combat zone compensation. These amounts are shown in box 13 of your Form W-2 with code "Q." See Publication 3, Armed Forces Tax Guide, for detailed information.
- Meals and lodging provided for the convenience of your employer.
- Housing allowance or rental value of a parsonage for the clergy.
Excludable employer-provided benefits.
If you are a Native American and received amounts for services performed as an employee that are exempt from federal income tax under the Internal Revenue Code or because of a treaty, agreement, Act of Congress, or other federal law, these amounts are nontaxable earned income when figuring the EIC. (However, any tax-exempt income you received for performing services as a self-employed individual is not earned income when figuring the EIC.)
Approved Form 4361 or Form 4029
This section is for persons who have an approved:
- Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or
- Form 4029, Application for Exemption from Social Security and Medicare Taxes and Waiver of Benefits.
Each approved form exempts certain income from social security taxes. Each form is discussed in this section in terms of what is or is not earned income for purposes of the EIC.
Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and "other employee compensation." "Other employee compensation" includes nontaxable compensation such as housing allowances or the rental value of a parsonage that you receive for services as an employee. Amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches.
Even if you have an approved Form 4029, all wages, salaries, tips, and other employee compensation count as earned income. However, amounts you received as a self-employed individual do not count as earned income. Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040.
If you retired on disability, benefits you receive under your employers disability retirement plan are considered earned income until you reach minimum retirement age. Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Report taxable pension payments on Form 1040, lines 16a and 16b (or Form 1040A, lines 12a and 12b).
Disability insurance payments.
Payments you received from a disability insurance policy that you paid the premiums for are not earned income. It does not matter whether you have reached minimum retirement age. If this policy is through your employer, the amount may be shown in box 13 of your Form W-2 with code "J."
Income That is Not Earned Income
Examples of items that are NOT earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits, alimony and child support, welfare benefits, workers compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans benefits, including VA rehabilitation payments. Do NOT include any of these items in your nontaxable or taxable earned income.
Earnings while an inmate.
Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. These amounts include amounts received through a work release program or while in a halfway house.
Nontaxable workfare payments are not earned income for the EIC. These are cash payments certain people receive from a state or local agency that administers public assistance programs funded under the federal Temporary Assistance for Needy Families (TANF) program in return for certain work activities such as (1) work experience activities (including remodeling or repairing public housing) if sufficient private sector employment is not available, or (2) community service program activities.
If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 2) , and live in a state that has community property laws, your earned income for the EIC does not include any amount earned by your spouse that is treated as belonging to you under those laws. That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your states community property laws.
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