Publication 596 |
2000 Tax Year |
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. You will figure your
earned income in chapter 4
by adding your taxable and nontaxable
earned income. Worksheet 2 on page 21 will help you figure
these amounts.
Taxable Earned Income
Taxable earned income includes:
- Wages, salaries, and tips,
- Net earnings from self-employment, and
- Gross income received as a statutory employee.
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).
Net earnings from self-employment.
You may have net earnings from self-employment if:
- You own your business, or
- You are a
minister or member of a religious
order.
Statutory employee.
You are a
statutory employee if you
receive a Form W-2 on which the "Statutory employee" box
(box 15) is checked. You report your income and expenses as a
statutory employee on Schedule C or C-EZ (Form 1040).
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.
-
Dependent care benefits
(line 18 of Form 2441 or Schedule 2
(Form 1040A)).
-
Adoption benefits
( Form 8839, line 26).
- Educational assistance benefits (these may be shown in box
14 of your Form W-2).
Native Americans
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.
Form 4361.
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.
Form 4029.
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.
Disability Benefits
If you retired on
disability, benefits you
receive under your employer's 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.
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 (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.
Community property.
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 state's community property laws.
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