Cynthia and Jerry Grey have two children, Kirk, age 8, and Susanne, age 6. The children lived with Cynthia and Jerry for all of 2005. Cynthia earned wages of $15,000 and Jerry had wages of $10,000. The Greys received $525 in interest on their savings account. They had no other income in 2005.

Cynthia and Jerry have the 2005 Form 1040A and instructions. They want to see if they qualify for the EIC, so they follow the steps in the instructions for lines 41a and 41b.

Completing the EIC Worksheet.   Cynthia and Jerry complete their worksheet as follows.

1. Cynthia and Jerry enter their total earned income ($25,000) on line 1.

2. To find their credit, they go to the EIC Table (in the Appendix of this publication). The part of the EIC Table used in this example is on the next page. They find their earned income of $25,000 in the range of $25,000 to $25,050. They follow this line across to the column Two children under Married filing jointly and find $2,577. They enter $2,577 on line 2.

3. They enter on line 3 their AGI ($25,525) and see that it is different from the amount on line 1.

4. They look up $25,525 in the EIC Table and enter the amount of $2,472 on line 5.

5. They enter $2,472 on line 6. This is the smaller of the line 2 amount ($2,577) and the line 5 amount ($2,472).

6. The Greys enter $2,472 on line 41a of their Form 1040A. They will now complete Schedule EIC (shown on page 36) and attach it to their return. They will keep the EIC Worksheet for their records.

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Sharon Rose is age 63 and retired. She received $7,000 in social security benefits during the year and $7,300 from a part-time job. She also received a taxable pension of $5,400. Sharon had no other income. Her AGI on line 22 of Form 1040A is $12,700 ($7,300 + $5,400).

Sharon is not married and lived alone in the United States for the entire year. She cannot be claimed as a dependent on anyone else's return. She does not have any investment income and does not have a qualifying child.

Sharon reads the steps for eligibility in her Form 1040A instructions. In Step 1 she discovers that, because her AGI ($12,700) is not less than $11,750, she cannot take the EIC. She completes the rest of her Form 1040A and files it with the IRS.

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 $2,200 in 2005. 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 Schedule SE, Section B, lines 15 and 4b. Steve figures self-employment tax of $244. He deducts one-half of it ($122) on Form 1040, line 27.

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 61. In addition, she and Steve received $200 in interest from a savings account.

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

The Greens read the instructions for Form 1040, lines 66a and 66b. In Step 2 they figure their investment income to be $4,200 ($200 interest income from Form 1040, line 8a, plus a $4,000 capital gain from Form 1040, line 13). But when they read the second and third questions in Step 2 they find that, because they have figured their investment income to be more than $2,700 and they are filing Form 4797, they must use Worksheet 1 in Publication 596 to see if they can take the EIC.

The Greens fill out Worksheet 1 (shown on page 38) in Publication 596. They find their correct investment income for EIC purposes to be $1,200, not $4,200. This is less than $2,700, so they meet Rule 6. They read the rest of Publication 596 and find that they meet all the rules to claim the EIC. For example, they will file a joint return (Rule 3). Both of their children are qualifying children (Rule 8). Also, their AGI of $16,878 ($15,000 + $4,000 + $200 - $2,200 - $122) is less than $37,263 (Rule 1).

They use EIC Worksheet B (shown on pages 39 and 40) to figure their EIC of $4,294. They also complete Schedule EIC (not shown) and attach it to their Form 1040.

Filled-in Worksheet 1 for Steve and Linda Green Worksheet 1: Investment Income If You Are Filing Form 1040

Interest and Dividends
1.		Enter any amount from Form 1040, line 8a.			1.	200
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 13. If the amount on that line is a loss, enter -0-.	5.	4,000
6.		Enter any gain from Form 4797, Sales of Business Property, line 7. If the amount on that line is a loss, enter -0-. (But, if you completed lines 8 and 9 of Form 4797, enter the amount from line 9 instead.)	6.	3,000
7.		Subtract line 6 of this worksheet from line 5 of this worksheet. (If the result is less than zero, enter -0-.)			7.	1,000
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 36.	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 -0-.)			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 -0-.)			13.
14.		Add the amounts on lines 1, 2, 3, 4, 7, 10, and 13. Enter the total. This is your Investment Income.			14.	1,200
15.		Is the amount on line 14 more than $2,700? □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 $1,500 and an Alaska Permanent Fund dividend of $1,100. You choose to report this income on your return. You enter $1,500 on line 1a of Form 8814, $1,100 on line 2, and $2,600 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 × ($1,100 ÷ $2,600)) = $577. 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.

Victor and Ida Brown have two children, Kevin, age 15, and Ashley, age 14. The children lived with Victor and Ida for all of 2005. Ida earned wages of $10,000 and Victor, a member of the clergy, received a salary of $17,000. Victor also receives a housing allowance of $500 a month ($6,000 a year) from the church. The Browns received $200 in interest on their savings account. They had no other income in 2005.

Victor does not have to pay income tax on his housing allowance but he does have to include it in net earnings from self-employment and pay self-employment tax on it. To figure his self-employment tax, he must complete Schedule SE (Form 1040). He completes Schedule SE and figures self-employment tax of $3,250. He puts this figure on Form 1040, line 58, and deducts $1,625, one-half of his self-employment tax, on Form 1040, line 27.

Victor and Ida read the Form 1040 instructions for lines 66a and 66b, and find that they meet all the rules to claim the EIC. For example, their AGI of $25,575 ($17,000 + $10,000 + $200 - $1,625) is less than $37,263 (Step 1, question 1). Their investment income ($200 interest income from a savings account) is less than $2,700 (Step 2). Both of their children are qualifying children (Step 3, question 2).