Earned Income Credit

The earned income credit (EIC) is available to persons with or without a qualifying child. This section will list separately the rules that persons with a qualifying child and persons without a qualifying child must meet to get the credit. After you have read the rules, if you think you may qualify for the credit, get Publication 596, Earned Income Credit. You can also find information in the instructions for Form 1040 (lines 60a and 60b), Form 1040A (lines 38a and 38b), or Form 1040EZ (lines 8a and 8b).

Investment income more than $2,400. You cannot claim the earned income credit unless your investment income is $2,400 or less. For most people, investment income is 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), and capital gain net income (line 13 of Form 1040 or line 10 of Form 1040A, if more than zero). If you have net rent and royalty income (if greater than zero) and net passive income (if greater than zero) that are not self-employment income or you are reporting a gain on Form 4797, Sales of Business Property, see Publication 596 for more information. Rents and royalties received in a trade or business are not investment income.

Modified AGI (adjusted gross income). Generally, you must know your earned income and modified AGI to figure the amount of your earned income credit. In many cases, your modified AGI will be the same as your AGI.

Modified AGI for most people is the amount on line 34 (Form 1040), line 19 (Form 1040A), and line 4 (Form 1040EZ). But if you are filing Schedule C, C-EZ, D, E, or F or you are claiming a loss from the rental of personal property not used in a trade or business or you received a distribution from a pension, annuity, or IRA that is not fully taxable, get Publication 596.

Credit has no effect on certain welfare benefits. The earned income credit and the advance earned income credit payments you receive will not be used to determine whether you are eligible for the following benefit programs, or how much you can receive from the programs.

• Temporary assistance for needy families.
• Medicaid and supplemental security income (SSI).
• Food Stamps and low-income housing.

Workfare payments. 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 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.

Social security number. You must provide a correct and valid social security number (SSN) for yourself, your spouse, and any qualifying children. If an SSN is missing or incorrect, you may not get the credit. Publication 596 contains more detailed information.

The social security number must be issued by the Social Security Administration to a U.S. citizen or to a person who has permission from the Immigration and Naturalization Service to work in the United States. If your social security card says "Not valid for employment," you cannot get the earned income credit.

Self-employed persons. If you are self-employed and your net earnings are $400 or more, be sure to correctly fill out Schedule SE (Form 1040), Self-Employment Tax, and pay the proper amount of self-employment tax. If you do not, you may not get all the credit to which you are entitled.

Who Can Claim the Credit?

The earned income credit is available to persons with or without a qualifying child. Some of the rules are the same, but some of the rules only apply to persons with a qualifying child or to persons without a qualifying child.

Persons Who Work and Have One or More Qualifying Children

Generally, if you are a nonresident alien for any part of the year, you cannot claim the credit. To claim the earned income credit under this section, you must meet all the following rules.

1. You must have a qualifying child who lived with you in the United States for more than half the year (the whole year for an eligible foster child).
2. You must have earned income during the year.
3. Your earned income and modified AGI must each be less than:
   1. $27,413 if you have one qualifying child, or
   2. $31,152 if you have more than one qualifying child.
4. Your investment income cannot be more than $2,400.
5. Your filing status can be any filing status except married filing a separate return.
6. You cannot be a qualifying child of another person. If you file a joint return, neither you nor your spouse can be a qualifying child of another person.
7. Your qualifying child cannot be the qualifying child of another person whose modified AGI is more than yours.
8. You usually must claim a qualifying child who is married as a dependent.
9. You are not filing Form 2555, Foreign Earned Income, (or Form 2555-EZ, Foreign Earned Income Exclusion).

Who is a qualifying child? You have a qualifying child if your child meets three tests. The tests are:

• Relationship,
• Residency, and
• Age.

Relationship test. To meet the relationship test for a qualifying child, the child must be your:

1. Son, daughter, or adopted child (or a descendant of your son, daughter, or adopted child -- for example, your grandchild),
2. Stepson or stepdaughter, or
3. Eligible foster child (including a niece, nephew, brother, sister, cousin). See Publication 596 for an explanation of an eligible foster child.

Residency test. To meet the residency test, there are two rules.

1. You must have a child who lived with you for more than half the year (the whole year if your child is an eligible foster child).
2. The home must be in the United States (one of the 50 states or the District of Columbia). United States military personnel stationed outside the United States on extended active duty are considered to live in the United States for the purposes of the earned income credit.

Age test. To meet the age test, your child must be:

1. Under age 19 at the end of the year,
2. A full-time student under age 24 at the end of the year, or
3. Permanently and totally disabled at any time during the tax year, regardless of age.

Persons Who Work and Do Not Have a Qualifying Child

Generally, if you are a nonresident alien for any part of the year, you cannot claim the earned income credit. In order to take the earned income credit under this section, you must meet all the following rules.

1. You must have earned income during the year.
2. Your earned income and modified AGI must each be less than $10,380.
3. Your investment income must be $2,400 or less.
4. Your filing status can be any filing status except married filing a separate return.
5. You cannot be a qualifying child of another person. If you file a joint return, neither you nor your spouse can be a qualifying child of another person.
6. 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 (usually December 31).
7. You cannot be eligible to be claimed as a dependent on anyone else's return. If you file a joint return, neither you nor your spouse can be eligible to be claimed as a dependent on anyone else's return.
8. Your main home (and your spouse's if filing a joint return) must be in the United States for more than half the year. United States military personnel stationed outside the United States on extended active duty are considered to live in the United States for the purposes of the earned income credit.
9. You are not filing Form 2555 or Form 2555-EZ.

Advance Earned Income Credit Payments

If you expect to qualify for the earned income credit in 2001, you can choose to receive advance payments of part of the credit in your regular paycheck.

You can request advance payments of the credit for 2001 by completing a 2001 Form W-5. See Publication 596 or the instructions for Form W-5 for more information on the advance earned income credit.

You must file a 2000 return to report what you already received as an advance payment in 2000 and to get any additional earned income credit.

You must have at least one qualifying child and qualify for the earned income credit to get the advance payment of the credit in your pay.

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