Publication 3 |
2000 Tax Year |
Earned Income Credit
After you have figured your taxable income and tax liability, you
can determine if you are entitled to any tax credits. Most tax credits
do not have special rules for members of the Armed Forces. However,
the earned income credit may be of interest to you.
The earned income credit (EIC) is a special credit for certain
persons who work. The credit reduces the amount of tax you owe (if
any) and is intended to offset some of the increases in living
expenses and social security taxes.
If you claim the EIC and it is later disallowed, you may have to
complete an additional form if you want to claim the credit in a
following year. See chapter 5 in Publication 596
for more information,
including how to claim the EIC after disallowance.
Persons With a Qualifying Child
If you have a qualifying child, you must meet all the following
rules to claim the earned income credit.
- You must have earned income during 2000.
- Your earned income and modified adjusted gross income (AGI)
must each be less than:
- $27,413 if you have one qualifying child, or
- $31,152 if you have more than one qualifying child. If you
do not have a qualifying child and earn less than $10,380, see
Persons Without a Qualifying Child , later.
- Your filing status cannot be "married filing separate
return."
- You (or your spouse, if filing a joint return) cannot be a
qualifying child of another person.
- Your qualifying child cannot be the qualifying child of
another person with a higher modified AGI.
- You cannot file Form 2555, Foreign Earned Income,
or Form 2555-EZ, Foreign Earned Income Exclusion,
to exclude income earned in foreign countries, or to deduct or
exclude a foreign housing amount. See Publication 54
for more
information.
- You must be a U.S. citizen or resident all year unless:
- You are married to a U.S. citizen or a resident alien,
and
- You choose to be treated as a resident alien for the entire
year. See Publication 519
for more information.
- Your investment income must be $2,400 or less during the
year. For most people, investment income is taxable interest and
dividends, tax-exempt interest, and capital gain net income.
- You must have a valid social security number for yourself,
your spouse (if filing a joint return), and any qualifying
child.
Qualifying child of more than one person.
If you and someone else have the same qualifying child, the person
with the higher modified AGI is the only one who may be able to claim
the credit. The person with the lower modified AGI cannot claim the
credit. This is true even if the person with the higher modified AGI
does not claim the credit or does not meet all the rules to claim the
credit.
Modified AGI for most people is the amount on line 33, Form 1040,
or line 19, Form 1040A. See Publication 596
if you file Schedule E or
you are claiming a loss from the rental of personal property not used
in a trade or business.
Qualifying child of another person.
If you are a qualifying child of another person, you cannot claim
the credit--no matter how many qualifying children you have.
How to report.
If you meet all these rules, fill out Schedule EIC and attach it to
either Form 1040 or Form 1040A. Also complete the worksheet in the
instructions for Form 1040 or Form 1040A to figure the amount of your
credit. If you have a qualifying child, you cannot claim the credit on
Form 1040EZ.
Enter "NO" directly to the right of line 60a (Form 1040) or
next to line 38a (Form 1040A) if you cannot claim the credit because:
- Your total taxable and nontaxable earned income was $27,413
or more if you have one qualifying child (or $31,152 or more if you
have more than one qualifying child),
- You were a qualifying child for another person in 2000,
- Your qualifying child was also the qualifying child of
another person whose modified AGI is higher than yours, or
- You, your spouse, or qualifying child does not have a valid
social security number.
Social security number.
You must provide a correct and valid social security number (SSN)
issued by the Social Security Administration for yourself, your
spouse, and any qualifying child. If a social security card for you,
your spouse, or your qualifying child says, "Not valid for
employment," you cannot get the credit.
If you need to get an SSN, file Form SS-5 with your local
Social Security Administration office. It takes approximately two
weeks to receive an SSN. If the filing deadline is approaching and you
do not have an SSN, you can:
- Request an automatic extension to August 15 using Form 4868,
or
- File the return on time without claiming the credit. After
you receive the SSN, file an amended return (Form 1040X) claiming the
credit and attach a filled-in Schedule EIC.
If an SSN for you, your spouse, or your qualifying child is missing
from your tax return, or is incorrect, you may not get the credit.
Married persons.
Married persons usually must file a joint return to claim the
earned income credit. Even though you are married, you may file as
head of household and claim the credit on your return if:
- Your spouse did not live in your home at any time during the
last 6 months of the year,
- You paid more than half the cost to keep up your home for
the entire year, and
- You and your child lived in the same main home for more than
half the year. You also must be entitled to claim an exemption for
your child.
You will meet (3), even if you cannot claim your child, if:
- You gave that right to the other parent by filling out Form
8332, Release of Claim to Exemption for Child of Divorced or
Separated Parents, or similar written statement, or
- There is a pre-1985 agreement (decree of divorce or separate
maintenance or written agreement) granting the exemption to your
child's other parent.
Qualifying Child
You have a qualifying child if your child meets three tests:
- Relationship,
- Residency, and
- Age.
Relationship test.
To meet the relationship test, the child must be your:
- Son, daughter, or adopted child (or a descendant of your
son, daughter, or adopted child--for example, your grandchild),
- Stepson or stepdaughter, or
- Eligible foster child.
Married child.
Generally, a married child can be your qualifying child only if you
can claim an exemption for the child. If you cannot claim an exemption
for your married child, he or she can still be your qualifying child
if the only reason you cannot claim the exemption is one of the
following.
- You gave the right to claim the child's exemption to your
child's other parent by filling out Form 8332, or a similar written
statement, or
- You gave the right to claim the child's exemption to your
child's other parent in a pre-1985 agreement (such as a separation
agreement or divorce decree).
If you need more information about either of these exceptions or
when you can claim an exemption for your child, see Publication 501,
or Publication 504,
Divorced or Separated Individuals.
Residency test.
To meet the residency test:
- A qualifying child must have lived in your home for more
than half the year (for the whole year if your child is an eligible
foster child), and
- The home must be in the United States. U.S. military
personnel stationed outside the United States on extended active duty
are considered to be living in the United States.
Birth or death of a child.
The child is considered to have lived with you for all of 2000 if:
- The child was born or died during the year, and
- The child lived with you for the part of the year he or she
was alive.
Temporary absences.
Count time that you or the qualifying child is away from home on a
temporary absence due to a special circumstance as time lived at home.
Examples of special circumstances include:
- Illness,
- Attending school,
- Business,
- Vacation, or
- Military service.
You may be eligible for the earned income credit if you are absent
temporarily only because of military service. To be eligible for the
credit, you must plan to return to your main home where your
qualifying child lives at the end of your assignment. Service in a
combat zone is a temporary absence.
Age test.
The age test is met if your child is:
- Under age 19 at the end of the year,
- A full-time student under age 24 at the end of the year, or
- Permanently and totally disabled at any time during the tax
year, regardless of age.
Persons Without a Qualifying Child
If you do not have a qualifying child, you can take the credit if
you meet all the following rules.
- You must have earned income during 2000.
- Your earned income and modified adjusted gross income must
each be less than $10,380.
- Your filing status cannot be "married filing separate
return."
- You (or your spouse, if filing a joint return) cannot be a
qualifying child of another person. See Qualifying child of
another person, earlier.
- You (or your spouse if filing a joint return) must be at
least age 25 but under age 65 at the end of your tax year.
- No one else is able to claim an exemption for you as a
dependent on his or her return.
- Your main home must be in the United States for more than
half the year. U.S. military personnel stationed outside the United
States on extended active duty are considered to live in the United
States.
- You cannot file Form 2555, Foreign Earned Income,
or Form 2555-EZ, Foreign Earned Income Exclusion.
- You must be a U.S. citizen or resident alien all year
unless:
- You are married to a U.S. citizen or a resident alien,
and
- You choose to be treated as a resident alien for the entire
year.
- Your investment income must be $2,400 or less during the
year. For most people, investment income is taxable interest and
dividends, tax-exempt interest, and capital gain net income.
- You (and your spouse, if filing a joint return) must have a
valid SSN. In either case, you can use only a valid SSN issued by the
Social Security Administration. If a social security card for you or
your spouse says, "Not valid for employment," you cannot get the
credit.
How to report.
If you meet all these rules, fill out the worksheet in your tax
forms instructions for EIC to figure the amount of your credit.
Enter "NO" directly to the right of line 60a (Form 1040), next
to line 38a (Form 1040A), or to the right of the word "below" on
line 8 (Form 1040EZ) if you cannot claim the credit because:
- Your total taxable and nontaxable earned income was $10,380
or more,
- You (and your spouse if filing a joint return) were under
age 25 or age 65 or more,
- Your home was not in the United States for more than half
the year,
- You were a qualifying child of another person in 2000, or
- You or your spouse did not have a valid SSN.
Earned Income
For purposes of the earned income credit, earned income includes:
- Wages, salaries, and tips,
- Long-term disability benefits you received before minimum
retirement age,
- Salary deferrals and reductions,
- Housing and subsistence allowances and in-kind equivalents
received by military members,
- Combat zone excluded pay (box 13, code Q of your Form
W-2),
- Earnings from self-employment, and
- Anything else of value, even if not taxable, that you
received for providing services.
For purposes of the earned income credit, the term "housing and
subsistence allowances" means the Basic Allowance for Housing (BAH)
and the Basic Allowance for Subsistence (BAS) received by military
personnel (with respect to grade and status) and the value of meals
and lodging furnished in kind to military personnel residing on
military bases. To calculate the value of meals and lodging furnished
in kind, you may assume that the value is equal to the combined BAH
and BAS that the military member would have received had he or she
been entitled to the allowance. Earned income that is not taxable,
such as combat pay, BAH, BAS, and certain in-kind equivalents, is
reported in box 13, Code Q, of Form W-2.
Earned income does not include:
- Interest and dividends,
- Social security and railroad retirement payments,
- Workfare payments,
- Pensions or annuities,
- Veterans' benefits (including VA rehabilitation payments),
- Variable housing allowances,
- Workers' compensation, or
- Unemployment compensation.
Example 1.
Corporal John Andrews and his wife Doris will file a joint return
for 2000. They have two children--Mark who is age 3 and Connie
who was born in May of 2000. Their total earned income is $23,650
(basic pay $16,104, BAH $4,896, BAS $2,650). John and Doris qualify
for the earned income credit.
Example 2.
Staff Sergeant Brad Wilson and his wife Judy will file a joint
return for 2000. They have two children--Angela who is 6 years
old and Eric who is 4 years old. Their total earned income is $34,054
(basic pay $25,140, which includes $7,780 nontaxable pay for service
in a combat zone, plus BAH $6,264 and BAS $2,650). Even though the
Wilsons' modified AGI is $17,360, they do not qualify for the earned
income credit because their total earned income is not less than
$31,152.
Military members should receive a Leave and Earnings
Statement at the end of the year that includes some of the
pertinent allowance information. You should refer to that statement or
your Form W-2 when determining earned income for EIC purposes.
You can also contact your legal assistance office or unit tax advisor
if you need additional help.
Advance Earned Income Credit
You must meet all the following rules to qualify for the advance
earned income credit in 2001. You must:
- Work and expect that your earned income and modified AGI
will each be less than a certain amount. The amount in 2000 was
$27,413. The amount for 2001 will be higher. See Form W-5,
Earned Income Credit Advance Payment Certificate, for the
2001 amount.
- Have a qualifying child.
- Meet all the rules explained in the instructions for Form
W-5.
If you expect to qualify for the earned income credit for 2001, you
can choose to get part of the credit in advance by giving a completed
2001 Form W-5 to your appropriate finance office. The credit
will be included regularly in your pay.
If you received advance earned income credit payments in 2000, you
must file either Form 1040 or Form 1040A for 2000 to report the
payments.
IRS Will Figure Your Credit for You
There are certain instructions you must follow before the IRS can
figure the credit for you. See Publication 967,
IRS Will Figure
Your Tax.
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