Publication 554 (2005), Older Americans' Tax Guide

5. Credits

Table of Contents

This chapter briefly discusses the credit for the elderly or disabled, the child and dependent care credit, and the earned income credit. You may be able to reduce your federal income tax by claiming one or more of these credits.

Credit for the Elderly or the Disabled

This section explains who qualifies for the credit for the elderly or the disabled and how to figure this credit. For more information, see Publication 524, Credit for the Elderly or the Disabled.

You can take the credit only if you file Form 1040 or Form 1040A. You cannot take the credit if you file Form 1040EZ.

Credit figured for you. If you choose to have the IRS figure the credit for you, see Publication 524. If you want the IRS to figure your tax, see Publication 967, The IRS Will Figure Your Tax.

Can You Take the Credit?

You can take the credit for the elderly or the disabled if:

You are a qualified individual, and
Your income is not more than certain limits.

See Figures 5-A and 5-B, later.

Qualified Individual

You are a qualified individual for this credit if you are a U.S. citizen or resident, and either of the following applies.

You were age 65 or older at the end of 2005.
You were under age 65 at the end of 2005 and all three of the following statements are true.
1. You retired on permanent and total disability (explained later).
2. You received taxable disability income for 2005.
3. On January 1, 2005, you had not reached mandatory retirement age (defined later under Disability income).

Age 65. You are considered to be age 65 on the day before your 65th birthday. Therefore, you are age 65 at the end of the year if you were born before January 2, 1941.

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Figures 5-A and 5-B. Are you a qualified individual?

U.S. citizen or resident. You must be a U.S. citizen or resident (or be treated as a resident) to take the credit. Generally, you cannot take the credit if you were a nonresident alien at any time during the tax year.

Exceptions. You may be able to take the credit if you are a nonresident alien who is married to a U.S. citizen or resident at the end of the tax year and you and your spouse choose to treat you as a U.S. resident. If you make that choice, both you and your spouse are taxed on your worldwide income.

If you were a nonresident alien at the beginning of the year and a resident at the end of the year, and you were married to a U.S. citizen or resident at the end of the year, you may be able to choose to be treated as a U.S. resident for the entire year. In that case, you may be allowed to take the credit. For information on these choices, see chapter 1 of Publication 519, U.S. Tax Guide for Aliens.

Married persons. Generally, if you are married at the end of the tax year, you and your spouse must file a joint return to take the credit. However, if you and your spouse did not live in the same household at any time during the tax year, you can file either a joint return or separate returns and still take the credit.

Head of household. You can file as head of household and qualify to take the credit even if your spouse lived with you during the first 6 months of the year if you meet certain tests. See Publication 524 and Publication 501.

Under age 65. If you are under age 65 at the end of the year, you can qualify for the credit only if you are retired on permanent and total disability. You are considered to be under age 65 at the end of 2005 if you were born after January 1, 1941. You are retired on permanent and total disability if:

You were permanently and totally disabled when you retired, and
You retired on disability before the end of the tax year.

Even if you do not retire formally, you are considered retired on disability when you have stopped working because of your disability. If you retired on disability before 1977, see Publication 524.

Permanent and total disability. You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. See Physician's statement, later.

Substantial gainful activity. Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit.

Full-time work (or part-time work done at the employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity.

Substantial gainful activity is not work you do to take care of yourself or your home. It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. However, doing this kind of work may show that you are able to engage in substantial gainful activity.

The fact that you have not worked for some time is not, of itself, conclusive evidence that you cannot engage in substantial gainful activity.

Physician's statement. If you are under 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired.

You do not have to file this statement with your Form 1040 or Form 1040A, but you must keep it for your records. The instructions for either Schedule R (Form 1040) or Schedule 3 (Form 1040A) include a statement your physician can complete and that you can keep for your records.

If you got a physician's statement in an earlier year and, due to your continued disabled condition, you were unable to engage in any substantial gainful activity during 2005, you may not need to get another physician's statement for 2005. For a detailed explanation of the conditions you must meet, see the instructions for Part II of Schedule R (Form 1040) or of Schedule 3 (Form 1040A). If you meet the required conditions, you must check the box in Part II, line 2 of Schedule R (Form 1040) or of Schedule 3 (Form 1040A).

If you checked in Part I, box 4, 5, or 6 of either Schedule R or Schedule 3, print in the space above the box in Part II, line 2, the first name(s) of the spouse(s) for whom the box is checked.

Disability income. If you are under age 65, you can qualify for the credit only if you have taxable disability income.

Disability income must meet the following two requirements.

It must be paid under your employer's accident or health plan or pension plan.
It must be included in your income as wages (or payments in lieu of wages) for the time you are absent from work because of permanent and total disability.

Payments that are not disability income. Any payment you receive from a plan that does not provide for disability retirement is not disability income. Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and is not disability income.

For purposes of the credit for the elderly or the disabled, disability income does not include amounts you receive after you reach mandatory retirement age. Mandatory retirement age is the age set by your employer at which you would have had to retire had you not become disabled.

Figuring the Credit

If you figure the credit yourself, fill out the front of either Schedule R (if you are filing Form 1040) or Schedule 3 (if you are filing Form 1040A). Next, fill out Part III of either Schedule R or Schedule 3.

Child and Dependent Care Credit

You may be able to claim this credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. The credit can be up to 35% of your expenses. To qualify, you must pay these expenses so you can work or look for work.

If you claim this credit, you must include on your return the name and taxpayer identification number (generally the social security number) of each qualifying person. If the correct information is not shown, the credit may be reduced or disallowed.

You also must show on your return the name, address, and the taxpayer identification number of the person(s) or organization(s) that provided the care.

For more information, see Publication 503, Child and Dependent Care Expenses.

Earned Income Credit

The earned income credit (EIC) is a tax credit for certain people who work and have earned income under $37,263. The EIC is available to persons with or without a qualifying child. This section will list separately the rules that persons with a qualifying child and persons without a qualifying child must meet to get the credit. After you have read the rules, if you think you may qualify for the credit, see Publication 596, Earned Income Credit. You also can find information in the instructions for Form 1040 (line 66a), Form 1040A (line 41a), or Form 1040EZ (line 8a).

Investment income more than $2,700. You cannot claim the EIC unless your investment income is $2,700 or less. For most people, investment income is taxable interest (line 8a of Form 1040 or 1040A, or Form 1040EZ, line 2), tax-exempt interest (line 8b of Form 1040 or 1040A, or written to the right of the words Form 1040EZ on Form 1040EZ, line 2), dividend income (line 9a of Form 1040 or 1040A), and capital gain net income (Form 1040, line 13, if more than zero on Form 1040A, line 10). See Publication 596 for more information.

Credit has no effect on certain welfare benefits. The EIC and any advance EIC payments you receive generally will not be used to determine whether you are eligible for the following benefit programs, or how much you can receive from the programs.

Medicaid and supplemental security income (SSI).
Food stamps.
Low-income housing.

Temporary Assistance for Needy Families (TANF) benefits may be affected. Please check with your state.

Social security number. You must provide a correct and valid social security number (SSN) for yourself, your spouse, and any qualifying children. If an SSN is missing or incorrect, you may not get the credit. See Publication 596 for more detailed information.

The social security number must be issued by the Social Security Administration to a U.S. citizen or to a person who has permission to work in the United States. If your social security card says not valid for employment, you cannot get the earned income credit.

Self-employed persons. If you are self-employed and your net earnings are $400 or more, be sure to correctly fill out Schedule SE (Form 1040), Self-Employment Tax, and pay the proper amount of self-employment tax. If you do not, you may not get all the credit to which you are entitled.

Special rule for determining earned income for individuals in the Hurricane Katrina disaster area. If your main home was in the Hurricane Katrina disaster area on August 25, 2005, you may be able to use your 2004 earned income to figure your EIC instead of your 2005 earned income. See Publication 4492 for more information on the requirements and limitations.

Who Can Claim the Credit?

The EIC is available to persons with or without a qualifying child. Some of the rules are the same, but some of the rules only apply to persons with a qualifying child or to persons without a qualifying child.

Persons Who Work and Have One or More Qualifying Children

Generally, if you are a nonresident alien for any part of the year, you cannot claim the credit. To claim the EIC under this section, you must meet all the following rules.

You must have a qualifying child who lived with you in the United States for more than half the year.
You must have earned income during the year.
Your earned income and adjusted gross income (AGI) each must be less than:
1. $31,030 ($33,030 for married filing jointly) if you have one qualifying child, or
2. $35,263 ($37,263 for married filing jointly) if you have more than one qualifying child.
Your investment income cannot be more than $2,700.
Your filing status can be any filing status except married filing separately.
You cannot be a qualifying child of another person. If you file a joint return, neither you nor your spouse can be a qualifying child of another person.
Your qualifying child cannot be used by more than one person to claim the credit. If you and someone else have the same qualifying child, you and the other person(s) can decide who will claim the credit using that child. If you and the other person(s) cannot agree, see Publication 596.
You are not filing Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

Who is a qualifying child? You have a qualifying child if your child meets three tests. The tests are:

Relationship,
Age, and
Residency.

Relationship test. To meet the relationship test for a qualifying child, the child must be your:

Son, daughter, stepchild, adopted child, or a descendant (for example, your grandchild),
Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew), or
Eligible foster child.

Age test. To meet the age test, your child must be:

Under age 19 at the end of the year,
A full-time student under age 24 at the end of the year, or
Permanently and totally disabled at any time during the tax year, regardless of age.

Residency test. To meet the residency test, there are two rules.

You must have a child who lived with you for more than half the year.
The home must be in the United States (one of the 50 states or the District of Columbia). U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States for the purposes of the earned income credit.

See Publication 596 for more information about any of these requirements.

Persons Who Work and Do Not Have a Qualifying Child

Generally, if you are a nonresident alien for any part of the year, you cannot claim the EIC. In order to take the EIC under this section, you must meet all the following rules.

You must have earned income during the year.
Your earned income and adjusted gross income (AGI) each must be less than $11,750 ($13,750 if married filing jointly).
Your investment income must be $2,700 or less.
Your filing status can be any filing status except married filing separately.
You cannot be a qualifying child of another person. If you file a joint return, neither you nor your spouse can be a qualifying child of another person.
You (or your spouse if filing a joint return) must be at least age 25 but under age 65 at the end of the year.
You cannot be eligible to be claimed as a dependent on anyone else's return. If you file a joint return, neither you nor your spouse can be eligible to be claimed as a dependent on anyone else's return.
Your main home (and your spouse's if filing a joint return) must be in the United States for more than half the year. U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States for the purposes of the earned income credit.
You are not filing Form 2555 or Form 2555-EZ.

Advance Earned Income Credit Payments

If you have a qualifying child and expect to qualify for the EIC in 2006, you can choose to receive advance payments of part of the credit in your regular paycheck.

You can request advance payments of the credit for 2006 by completing a 2006 Form W-5. See Publication 596 or the Form W-5 instructions for more information on the advance EIC.

If you received advance payments of EIC in 2005, you must file a 2005 return to report payments and to get any additional earned income credit for 2005.

You must have at least one qualifying child and qualify for the EIC to get the advance payment of the credit in your pay.