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 2001. 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 56.

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 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 $2,895. 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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