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Publication 596 2003 Tax Year

Rules for Everyone

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

This chapter discusses Rules 1 through 7. You must meet all seven rules to qualify for the earned income credit. If you do not meet all seven rules, you cannot get the credit and you do not need to read the rest of the publication.

Note. If you meet all seven rules in this chapter, then read either chapter 2 or chapter 3 (whichever applies) for more rules you must meet.

Your Adjusted Gross Income (AGI) Must Be Less Than:

Rule 1.

AGI Limits


  • $33,692 ($34,692 for married filing jointly) if you have more than one qualifying child,

  • $29,666 ($30,666 for married filing jointly) if you have one qualifying child, or

  • $11,230 ($12,230 for married filing jointly) if you do not have a qualifying child.


Adjusted gross income (AGI).   AGI is the amount on line 4 of Form 1040EZ, line 22 of Form 1040A, or line 35 of Form 1040.


  If your AGI is equal to or more than the applicable limit listed above, you cannot claim the EIC. You do not need to read the rest of this publication.


Example.

Example:

AGI exceeds limit

Your AGI is $30,000, you are single, and you have one qualifying child. You cannot claim the EIC because your AGI is not less than $29,666. However, if your filing status was married filing jointly, you might be able to claim the EIC because your AGI is less than $30,666.

Community property.   If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your AGI 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 7.


You Must Have a Valid Social Security Number (SSN)

Rule 2.

Social Security Number (SSN)
Valid SSN.   To claim the EIC, you (and your spouse, if filing a joint return) must have a valid SSN issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC must also have a valid SSN. (See Rule 8 if you have a qualifying child.)


  If your social security card (or your spouse's, if filing a joint return) says “Not valid for employment” and your SSN was issued so that you (or your spouse) could get a federally funded benefit, you cannot get the EIC. An example of a federally funded benefit is Medicaid. If you have a card with the legend “Not valid for employment” and your immigration status has changed so that you are now a U.S. citizen or permanent resident, ask the SSA for a new social security card without the legend. If you get the new card after you have already filed your return, you can file an amended return on Form 1040X, Amended U. S. Individual Income Tax Return, to claim the EIC.


U.S. citizen.   If you were a U.S. citizen when you received your SSN, you have a valid SSN.


Valid for work only with INS authorization.   If your social security card reads “Valid for work only with INS authorization,” you have a valid SSN.


SSN missing or incorrect.   If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC.


Other taxpayer identification number.   You cannot get the EIC if, instead of an SSN, you (or your spouse, if filing a joint return) have an individual taxpayer identification number (ITIN). ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN.


No SSN.   If you do not have a valid SSN, put “No” directly to the right of line 63 (Form 1040), line 41 (Form 1040A), or print “No” on line 8 (Form 1040EZ). You cannot claim the EIC.


Getting an SSN.   If you (or your spouse, if filing a joint return) do not have an SSN, you can apply for one by filing Form SS–5 with the Social Security Administration.


Filing deadline approaching and still no SSN.   If the filing deadline is approaching and you still do not have an SSN, you have two choices.

  1. Request an automatic 4-month extension of time to file your return. You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. For more information, see the instructions for Form 4868.

  2. File the return on time without claiming the EIC. After receiving the SSN, file an amended return, Form 1040X, claiming the EIC. Attach a filled-in Schedule EIC, Earned Income Credit, if you have a qualifying child.


Your Filing Status Cannot Be “Married Filing Separately”

Rule 3.

Married Person's Filing Status

If you are married, you usually must file a joint return to claim the EIC. Your filing status cannot be “Married filing separately.”

Spouse did not live with you.   If you are married and your spouse did not live in your home at any time during the last 6 months of the year, you may be able to file as head of household, instead of married filing separately. In that case, you may be able to claim the EIC. For detailed information about filing as head of household, see Publication 501, Exemptions, Standard Deduction, and Filing Information.


You Must Be a U.S. Citizen or Resident Alien All Year

Rule 4.

Nonresident Alien

You cannot claim the earned income credit if you are a nonresident alien for any part of the year, unless:

  1. You are married to a U.S. citizen or a resident alien, and

  2. You choose to be treated as a resident for all of 2003 by filing a joint return. If you need more information on making this choice, get Publication 519, U.S. Tax Guide for Aliens.


Note.   If you make the choice in (2) above, you and your spouse are taxed on your worldwide income. You cannot claim any tax treaty benefits as a resident of a foreign country during a tax year in which the choice is in effect.


You Cannot File Form 2555 or Form 2555–EZ

Rule 5.

Foreign Earned Income

You cannot claim the earned income credit if you file Form 2555, Foreign Earned Income, or Form 2555–EZ, Foreign Earned Income Exclusion. You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. U.S. possessions are not foreign countries. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more detailed information.

Your Investment Income Must Be $2,600 or Less

Rule 6.

Investment Income

You cannot claim the earned income credit unless your investment income is $2,600 or less. If your investment income is more than $2,600, you cannot claim the credit.

Form 1040EZ.   If you file Form 1040EZ, your investment income is the total of the amount on line 2 and the amount of any tax-exempt interest you wrote to the right of the words “Form 1040EZ” on line 2.


Form 1040A.   If you file Form 1040A, your investment income is the total of the amounts on lines 8a (taxable interest), 8b (tax-exempt interest), 9a (ordinary dividends), and 10a (capital gain distributions) on that form.


Form 1040.   If you file Form 1040, use Worksheet 1, on the next page, to figure your investment income.


Worksheet 1: Investment Income If You Are Filing Form 1040

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Interest and Dividends        
1.   Enter any amount from Form 1040, line 8a.     1.  
2.   Enter any amount from Form 1040, line 8b, plus any amount on Form 8814, line 1b.     2.  
3.   Enter any amount from Form 1040, line 9a.     3.  
4.   Enter the amount from Form 1040, line 21, that is from Form 8814 if you are filing that form to report your child's interest and dividend income on your return. (See instructions below for line 4 if your child received an Alaska Permanent Fund dividend.)     4.  
Capital Gain Net Income        
5.   Enter the amount from Form 1040, line 13a. If the amount on that line is a loss, enter zero. 5.      
6.   Enter any gain from Form 4797, Sales of
Business Property, line 7, column (g). If the amount on that line is a loss, enter zero. (But, if you completed lines 8 and 9 of Form 4797, enter the amount from line 9, column (g), instead.) 		6.      
7.   Subtract line 6 of this worksheet from line 5 of this worksheet. (If the result is less than zero, enter zero.)     7.  
Royalties and Rental Income from Personal Property        
8.   Enter any royalty income from Schedule E, line 4, plus any income from the rental of personal property shown on Form 1040, line 21. 8.      
9.   Enter any expenses from Schedule E, line 21, related to royalty income, plus any expenses from the rental of personal property deducted on Form 1040, line 33. 9.      
10.   Subtract the amount on line 9 of this worksheet from the amount on line 8. (If the result is less than zero, enter zero.)     10.  
Passive Activities        
11.   Enter the total of any net income from passive activities (included on Schedule E, lines 26, 29a (col. (g)), 34a (col. (d)), and 40). (See instructions below for lines 11 and 12.) 11.      
12.   Enter the total of any losses from passive activities (included on Schedule E, lines 26, 29b (col. (f)), 34b (col. (c)), and 40). (See instructions below for lines 11 and 12.) 12.      
13.   Combine the amounts on lines 11 and 12 of this worksheet. (If the result is less than zero, enter zero.)     13.  
14.   Add the amounts on lines 1, 2, 3, 4, 7, 10, and 13. Enter the total. This is your Investment Income.     14.  
15.   Is the amount on line 14 more than $2,600?
□Yes.You cannot take the credit.
□No. Go to Question 5 in Step 2 of your Form 1040 instructions to find out if you can take the credit (unless you are using this publication to find out if you can take the credit; in that case, go to Rule 7, next). 		 
Instructions for line 4 if your child received Alaska Permanent Fund dividends.To figure the amount to enter on line 4, start with the amount on line 6 of Form 8814. Multiply that amount by a percentage that is equal to any Alaska Permanent Fund dividends divided by the total amount of interest and dividend income on lines 1a and 2 of Form 8814. Subtract the result from the amount on line 6 of Form 8814.
Example.Your 10-year-old child has taxable interest income of $500 and an Alaska Permanent Fund dividend of $2,000. You choose to report this income on your return. You enter $500 on line 1a of Form 8814, $2,000 on line 2, and $2,500 on line 4. You enter $1,000 on line 6 of Form 8814 and line 21 of Form 1040. You figure the amount to enter on line 4 of this worksheet as follows:
$1,000 – ($1,000 × ($2,000 ÷ $2,500)) = $200.
Instructions for lines 11 and 12.In figuring the amount to enter on lines 11 and 12, do not take into account any royalty income (or loss) included on line 26 of Schedule E or any amount included in your earned income. To find out if the income on line 26 or line 40 of Schedule E is from a passive activity, see the Schedule E instructions. If any of the rental real estate income (or loss) included on Schedule E, line 26, is not from a passive activity, print “NPA” and the amount of that income (or loss) on the dotted line next to line 26.

You Must Have Earned Income

Rule 7.

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. If you are an employee, earned income includes all the taxable income you get from your employer.

Rule 15 has information that will help you figure the amount of your earned income. If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the Form 1040 instructions.

Earned Income

Earned income includes:

  1. Wages, salaries, and tips,

  2. Net earnings from self-employment, and

  3. 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.


Minister's housing.   The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned income for the EIC (except in certain cases described in Approved Form 4361 or Form 4029, below). See Example 4 in chapter 7.


Statutory employee.   You are a statutory employee if you receive a Form W–2 on which the “Statutory employee” box (box 13) is checked. You report your income and expenses as a statutory employee on Schedule C or C–EZ (Form 1040).


Strike benefits.   Strike benefits paid by a union to its members are earned income.


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 taxable employee compensation. 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 taxable 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 12 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 (including disability 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 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. This includes amounts for work performed while in 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 3), 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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