Part D. Figuring & Claiming the EIC

Use this part if you have met all the rules in Parts A and B, or all the rules in Parts A and C.

This part of the chapter discusses Rules 14 and 15. You must meet both rules, in addition to the rules in Parts A and B, or Parts A and C, to qualify for the earned income credit.

This part of the chapter also explains how to figure the amount of your credit. You have two choices.

1. Have the IRS figure the EIC for you. If you want to do this, see IRS Will Figure the EIC for You.
2. Figure the EIC yourself. If you want to do this, see How To Figure the EIC Yourself.

Rule 14. Your Total Earned Income Must Be Less Than:

• $32,121 if you have more than one qualifying child,
• $28,281 if you have one qualifying child, or
• $10,710 if you do not have a qualifying child.

Earned income is explained in Rule 6 in Part A and some examples are shown in Table 37-2. You figure your total earned income by adding together your taxable earned income and your nontaxable earned income.

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 your total earned income and the amount of EIC.

Church employee. In this publication, this term means an employee (other than a minister or member of a religious order) of a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.

Taxable earned income. You figure your taxable earned income by starting with the amount on the Wages line on your tax return ( line 7, Forms 1040 and 1040A, or line 1, Form 1040EZ). You then subtract the following amounts from the amount on the Wages line on your tax return.

• Any taxable scholarship or fellowship grant not reported on a Form W-2.
• Any amount you received for work done while an inmate in a penal institution that is included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ).
• Any amounts you received as a pension or annuity from a nonqualified deferred compensation plan or a section 457 plan and that were included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ).
• Any amount on line 2 of Schedule SE that was also reported on line 7 (Form 1040), if you are a member of the clergy.
• Any amount you included on both line 5a of Schedule SE and line 7 (Form 1040).

Nontaxable earned income. You figure your nontaxable earned income by adding the amounts of any nontaxable earned income items you had during the year. Examples of nontaxable earned income items are shown in Rule 6 and Table 37-2.

Table 37-2. Examples of Taxable and Nontaxable Earned Income

Total earned income. You figure your total earned income by adding together your taxable earned income and your nontaxable earned income. You will need this amount when you figure the amount of your EIC.

If your total earned income is more than:

• $32,121 if you have more than one qualifying child,
• $28,281 if you have one qualifying child, or
• $10,710 if you do not have a qualifying child,

you cannot get the EIC. You do not need to read the rest of this chapter. You can go back and finish the rest of your tax return.

Rule 15. Your Modified AGI Must Be Less Than:

• $32,121 if you have more than one qualifying child,
• $28,281 if you have one qualifying child, or
• $10,710 if you do not have a qualifying child.

Modified adjusted gross income (AGI). Modified AGI for most people is the same as AGI. AGI is the amount on line 34 (Form 1040), line 20 (Form 1040A), or line 4 (Form 1040EZ). To find your modified AGI, you must add certain amounts such as tax-exempt interest and some other gains and losses. But if you are filing Schedule C, C-EZ, D, E, or F, or if you claim a loss from the rental of personal property not used in a trade or business, you must get Publication 596 to figure your modified AGI. You must also get Publication 596 if you (or your spouse if filing a joint return) received any distributions from a pension, annuity, or IRA that are not fully taxable.

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 adjusted gross income (AGI) for the EIC includes that portion of both your and your spouse's wages that you are required to include in gross income. This is different from the community property rules that apply under Rule 6.

Example. Bob will file Form 1040A. His AGI (line 20) is $12,000. He will report $300 of tax-exempt interest from a municipal bond on line 8b. His modified AGI for the EIC is $12,300 ($12,000 + $300).

IRS Will Figure the EIC for You

The IRS will figure the amount of your EIC for you if you follow the steps explained in this section. If you have a qualifying child, complete and attach Schedule EIC.

Please do not ask the IRS to figure your EIC unless you are eligible for it. Read the rules in Parts A, B, C, and D to see if you qualify.

If you want the IRS to also figure the amount of your income tax, see chapter 31.

Form 1040

If you file Form 1040 and want the IRS to figure your credit for you, follow these steps.

1. Print EIC directly to the right of line 61a. Also, if you have any earned income that is not taxed, enter the amount of that income on line 61b. See Table 37-2 for examples of earned income that is not taxed. Then, if you have any of the situations listed later under Special Instructions, follow those instructions.
2. Complete all other parts of your return that apply to you (including line 56), but do not fill in lines 66, 67, 68, and 70. If you do not have a qualifying child, stop here.
3. If you have a qualifying child, complete Schedule EIC according to its instructions. Be sure to enter the child's social security number on line 2 of that schedule. If you do not, your credit may be reduced or disallowed. Attach Schedule EIC to your return.

Form 1040A

If you file Form 1040A and want the IRS to figure your credit for you, follow these steps.

1. Print EIC directly to the right of line 39a. Also, if you have earned income that is not taxed, enter the amount of that income on line 39b. See Table 37-2 for examples of earned income that is not taxed. Then, if you have any of the situations listed later under Special Instructions, follow those instructions.
2. Complete all other parts of your return that apply to you (including line 36), but do not fill in lines 41, 42, 43, and 45. If you do not have a qualifying child, stop here.
3. If you have a qualifying child, complete Schedule EIC according to its instructions. Be sure to enter the child's social security number on line 2 of that schedule. If you do not, your credit may be reduced or disallowed. Attach Schedule EIC to your return.

Form 1040EZ

If you file Form 1040EZ and want the IRS to figure your credit for you, follow these steps.

1. Print EIC on line 9b. Also, if you have earned income that is not taxed, enter the amount on line 9b. See Table 37-2 for examples of earned income that is not taxed. Then, if you have any of the situations listed later under Special Instructions, follow those instructions.
2. Complete all other parts of your return that apply to you, but do not fill in lines 10, 12a, or 13.

Special Instructions

Use the following special instructions, if the situation applies to you.

Qualifying child information (Schedule EIC). Whether the IRS figures your credit or you figure it yourself, you must give the IRS information about your qualifying child. To do this, complete Schedule EIC and attach it to your Form 1040 or Form 1040A.

The information you enter on Schedule EIC must show that the child meets all the tests for a qualifying child. (See Rule 7.) The schedule has space for information about only two qualifying children because the amount of your credit is the same whether you have two, three, or more qualifying children.

Do not file Form 1040EZ if you have a qualifying child and qualify for the credit. You must file Form 1040 or Form 1040A.

Minister or member of a religious order. If you are filing Schedule SE and line 2 of that schedule includes an amount that is also included on Form 1040, line 7, print "Clergy" directly to the right of line 61a (Form 1040). Also show the amount included on both lines (for example, "Clergy $800"). If you received a housing allowance or were provided housing and you were required to include the allowance or the rental value of the parsonage on Schedule SE, line 2, do not include it as nontaxable earned income on line 61b of Form 1040.

Household employee. If you were a household employee who did not receive a Form W-2 because your employer paid you less than $1,300 in 2001, print "HSH" and the amount paid that was not reported on Form W-2 in the space to the right of the words "W-2 form(s)" on line 1 (Form 1040EZ), or on the dotted line next to line 7 (Form 1040), or in the space to the left of line 7 (Form 1040A). Also, be sure to include that amount in the total for line 1 of Form 1040EZ or line 7 of either Form 1040 or Form 1040A.

Inmates. If you were an inmate in a penal institution and the total on line 7 (Form 1040 or Form 1040A), or line 1 (Form 1040EZ) includes an amount paid to you for work performed while an inmate, print "PRI" and the amount paid on the dotted line next to line 7 (Form 1040), in the space to the left of line 7 (Form 1040A), or in the space to the right of the words "W-2 form(s)" on line 1 (Form 1040EZ).

Deferred compensation plans. If you received a pension or annuity from a nonqualified deferred compensation plan or a section 457 plan, put "DFC" and the amount subtracted on the dotted line next to line 7 (Form 1040). This amount may be reported in box 11 of your Form W-2. If you received such an amount but box 11 is blank, contact your employer for the amount of the pension or annuity.

How To Figure the EIC Yourself

This part of this chapter explains how to use the EIC Worksheet and how to report the credit on your return. To figure the amount of your earned income credit, you can use the Earned Income Credit Worksheet (EIC Worksheet) in the instruction booklet for Form 1040, Form 1040A, or Form 1040EZ, and the Earned Income Credit (EIC) Table in the tax form instruction booklet. However, certain people must use Publication 596 to see if they meet the rules to take the EIC and to figure the amount of the credit. You must use Publication 596 if any of the following situations applies to you.

• The amount on Form 1040, line 21, includes an amount from Form 8814 (relating to a child's interest and dividends).
• Your investment income (Rule 5) is $2,450 or more and you are filing Form 4797 (relating to the sale of business property).
• You are filing Schedule E, Supplemental Income and Loss, (Form 1040).
• You are reporting income or a loss from the rental of personal property not used in a trade or business.
• You are claiming a loss on Form 1040, line 12, 13, or 18.
• You (or your spouse if filing a joint return) received distributions from a pension, annuity, or IRA that are not fully taxable.
• You owe alternative minimum tax (AMT), found on Form 1040, line 41, or included in the total found on Form 1040A, line 35.

The amount of your earned income credit depends on:

• Whether you have no qualifying child, one qualifying child, or two or more qualifying children,
• The amount of your earned income (defined in Rule 7) and modified AGI (defined in Rule 15), and
• Whether you owe AMT.

Form 1040 and EIC Worksheet. If you file Form 1040 and want to figure the credit yourself, follow these steps.

1. Go to your form instruction booklet and turn to the instructions for Lines 61a and 61b and look for Worksheet A or Worksheet B.
2. Complete the EIC Worksheet that applies to your situation according to its instructions. If you were self-employed or a church employee or used Schedule C or C-EZ as a statutory employee, complete Worksheet B. Find the amount of your credit in the EIC Table in your instruction booklet.
3. Enter the amount of your earned income credit from Worksheet A or B on Form 1040, line 61a.
4. Enter the amount and type of any nontaxable earned income on Form 1040, line 61b.
5. Keep the EIC Worksheet for your records. Do not attach it to your income tax return. If you do not have a qualifying child, stop here.
6. If you have a qualifying child, complete Schedule EIC according to its instructions. Be sure to enter the child's social security number on line 2 of that schedule. If you do not, your credit may be reduced or disallowed. Attach Schedule EIC to your return.

Form 1040A and EIC Worksheet. If you file Form 1040A and want to figure the credit yourself, follow these steps.

1. Go to your form instruction booklet and turn to the instructions for Lines 39a and 39b and look for the EIC Worksheet.
2. Complete the EIC Worksheet according to its instructions. Find the amount of your credit in the EIC Table in your form instruction booklet.
3. Enter the amount of your earned income credit from line 6 of the EIC Worksheet on Form 1040A, line 39a.
4. Enter the amount of any nontaxable earned income on Form 1040A, line 39b.
5. Keep the EIC Worksheet for your records. Do not attach it to your income tax return. If you do not have a qualifying child, stop here.
6. If you have a qualifying child, complete Schedule EIC according to its instructions. Be sure to enter the child's social security number on line 2 of that schedule. If you do not, your credit may be reduced or disallowed. Attach Schedule EIC to your return.

Form 1040EZ and EIC Worksheet. If you file Form 1040EZ and want to figure the credit yourself, follow these steps.

1. Go to your form instruction booklet and turn to the instructions for Lines 9a and 9b and look for the EIC Worksheet.
2. Complete the EIC Worksheet according to its instructions. Find the amount of your credit in the EIC Table in your form instruction booklet.
3. Enter the amount of your earned income credit from line 6 of the EIC Worksheet on Form 1040EZ, line 9a.
4. Enter the amount of any nontaxable earned income on Form 1040EZ, line 9b.
5. Keep the EIC Worksheet for your records. Do not attach it to your income tax return.

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