Example 4. Steve & Linda Green

Steve and Linda Green have two children, a loss from a dairy farm, and a net capital gain from selling cows.

Steve and Linda Green have two children, Amy, age 8, and Carol, age 10, who lived with them all year.

Steve owns and operates a dairy farm that had a loss of $2,000 in 2000. Steve reports this loss on Schedule F and on Form 1040, line 18. Steve qualifies and chooses to use the optional method to figure net earnings, so he uses Section B of Schedule SE. He enters $1,600 on lines 15 and 4b of Section B of Schedule SE. Steve figures self-employment tax of $244. He deducts one-half of it ($122) on line 27 (Form 1040).

Linda had wages of $15,000, which she reports on Form 1040, line 7. She also received advance EIC payments of $1,140, which she reports on Form 1040, line 55.

Steve and Linda had a $1,000 loss from the sale of stock and a $5,000 gain from the sale of raised dairy cows they had held for 3 years. They report the $5,000 gain on Form 4797, Sales of Business Property. They do not have any other sales to report on Form 4797, so they enter $5,000 on line 7, column (g), of Form 4797 and on line 11, column (f), of Schedule D. (They have no prior year section 1231 losses.) They report their net capital gain of $4,000 from Schedule D on Form 1040, line 13.

The Greens read Publication 596 to see if they can claim the EIC. They use Worksheet 1 (shown here) to figure their investment income, which is zero. They use Worksheet 3 (not shown) to figure their modified AGI. They start with their AGI of $16,878 ($15,000 + $4,000 - $2,000 - $122). When they add 75% of their farm loss to their AGI, they find their modified AGI is $18,378 ($16,878 + $1,500). They find that they are eligible to get the EIC. They use EIC Worksheet B (shown here) to figure their EIC of $2,691. They also complete Schedule EIC (not shown) and attach it to their Form 1040.
  

Greens' Worksheet 1: Invesment Income Worksheet

Greens' EIC Worksheet B, page 1

Greens' EIC Worksheet B, page 2

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