Publication 554 (2006), Older Americans' Tax Guide

5. Credits

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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.

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 alien, and either of the following applies.

You were age 65 or older at the end of 2006.
You were under age 65 at the end of 2006 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 2006.
3. On January 1, 2006, 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, 1942.

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

Figure 5-A. Are You a Qualified Individual? and Figure 5-B. Income Limits . Summary: This flowchart is used to determine if a taxpayer is a qualified individual to take the credit for the elderly or the disabled. The list that follows the flowchart illustrates the conditions that disqualify an individual from the credit for the elderly or the disabled.Start. This is the starting of the flowchart.Decision (1). Are you a U.S. citizen or resident alien? (see Footnote 1)Footnote 1: If you were a nonresident alien at any time during the tax year and were married to a U.S. citizen or resident alien at the end of the tax year, see U.S. Citizen or Resident Alien under Qualified Individual. If you and your spouse choose to treat you as a U.S. resident alien, answer yes to this question.

IF Yes Continue To Decision (2)

IF No Continue To Process (a)

Process (a). You are not a qualified individual and cannot take the credit for the elderly or the disabled.

Continue To End

Decision (2). Were you 65 or older at the end of the tax year?

IF Yes Continue To Process (b)

IF No Continue To Decision (3)

Process (b). You are a qualified individual and may be able to take the credit for the elderly or the disabled unless your income exceeds the limits in Figure 5-B.

Continue To End

Decision (3). Are you retired on permanent and total disability?

IF Yes Continue To Decision (4)

IF No Continue To Process (a)

Decision (4). Did you receive taxable disability benefits this year?

IF Yes Continue To Process (5)

IF No Continue To Decision (b)

Decision (5). Did you reach mandatory retirement age before this year? (see Footnote 2)Footnote 2: Mandatory retirement age is the age set by your employer at which you would have been required to retire, had you not become disabled.

IF Yes Continue To Process (a)

IF No Continue To Process (b)

End. This is the ending of the flowchart.

IF your filing status is Single, Head of household, or Qualifying widow(er) with dependent child ... THEN even if you qualify (see Figure 5-A), you cannot take the credit if your adjusted gross income (A.G.I.) is equal to or more than $17,500 (Footnote: A.G.I. is the amount on Form 1040A, line 21, or Form 1040, line 37.) OR the total of your nontaxable social security and other nontaxable pension(s) is equal to or more than $5,000

IF your filing status is Married filing a joint return and both spouses qualify in Figure 5-A ... THEN even if you qualify (see Figure 5-A), you cannot take the credit if Your adjusted gross income (A.G.I.) is equal to or more than $25,000 (Footnote: A.G.I. is the amount on Form 1040A, line 21, or Form 1040, line 37.) OR the total of your nontaxable social security and other nontaxable pension(s) is equal to or more than $7,500

IF your filing status is Married filing a joint return and only one spouse qualifies in Figure 5-A ... THEN even if you qualify (see Figure 5-A), you cannot take the credit if Your adjusted gross income (A.G.I.) is equal to or more than $20,000 (Footnote: A.G.I. is the amount on Form 1040A, line 21, or Form 1040, line 37.) OR the total of your nontaxable social security and other nontaxable pension(s) is equal to or more than $5,000

IF your filing status is Married filing a separated return and you did not live with your spouse at any time during the year ... THEN even if you qualify (see Figure 5-A), you cannot take the credit if Your adjusted gross income (A.G.I.) is equal to or more than $12,500 (Footnote: A.G.I. is the amount on Form 1040A, line 21, or Form 1040, line 37.) OR the total of your nontaxable social security and other nontaxable pension(s) is equal to or more than $3,750

U.S. citizen or resident alien. You must be a U.S. citizen or resident alien (or be treated as a resident alien) 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 alien at the end of the tax year and you and your spouse choose to treat you as a U.S. resident alien. 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 alien at the end of the year, and you were married to a U.S. citizen or resident alien at the end of the year, you may be able to choose to be treated as a U.S. resident alien 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 and have taxable disability income (discussed later under Disability income). You are considered to be under age 65 at the end of 2006 if you were born after January 1, 1942. 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 may be considered retired on disability when you have stopped working because of your disability. If you retired on disability before 1977 and were not permanently and totally disabled at the time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977.

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 2006, you may not need to get another physician's statement for 2006. 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 box 4, 5, or 6 in Part I 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 must also have taxable disability income to qualify for the credit.

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

You can figure the credit yourself, or the IRS will figure it for you.

Figuring the credit yourself. 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.

Credit figured for you. If you can take the credit and choose to have the IRS figure the credit for you, see Publication 524 or the Instructions for Schedule R (Form 1040) or Schedule 3 (Form 1040A). If you want the IRS to figure your tax, see Publication 967, The IRS Will Figure Your Tax.

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 $38,348. The EIC is available to persons with or without a qualifying child.

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.

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.

Do You Qualify for the Credit?

To qualify to claim the EIC, you must first meet Rules 1 through 7 in Part A of Table 5-1, Rules for Everyone. Then you must meet Rules 8 through 10 in Part B of Table 5-1, Rules If You Have a Qualifying Child, or Rules 11 through 14 in Part C of Table 5-1, Rules If You Do Not Have a Qualifying Child. There is one final rule you must meet, Rule 15, in Part D of Table 5-1, Figuring and Claiming the EIC. You qualify for the credit if you meet all the rules in each part that applies to you.

If you have a qualifying child, the rules in Parts A, B, and D apply to you.
If you do not have a qualifying child, the rules in Parts A, C, and D apply to you.

Table 5-1, Earned Income Credit in a Nutshell. Use Table 5-1 as a guide to Parts A, B, C, and D. The table is a summary of all the rules in each part. After you have read the rules in the table, if you think you may qualify for the credit, see Publication 596, Earned Income Credit, for more details. You also can find more information in the instructions for Form 1040 (line 66a), Form 1040A (line 40a), or Form 1040EZ (line 8a).

Adjusted gross income (AGI). Under Rule 1, you cannot claim the EIC unless your AGI is less than the applicable limit. Your AGI is the amount on line 38 (Form 1040), line 22 (Form 1040A), or line 4 (Form 1040EZ).

Table 5-1. Earned Income Credit in a Nutshell

First, you must meet all the rules in this column.		Second, you must meet all the rules in one of these columns, whichever applies.		Third, you must meet the rule in this column.
Part A. Rules for Everyone		Part B. Rules If You Have a Qualifying Child	Part C. Rules If You Do Not Have a Qualifying Child	Part D. Figuring and Claiming the EIC
1. Your adjusted gross income (AGI) must be less than: •$36,348 ($38,348 for married filing jointly) if you have more than one qualifying child, •$32,001 ($34,001 for married filing jointly) if you have one qualifying child, or •$12,120 ($14,120 for married filing jointly) if you do not have a qualifying child.	2. You must have a valid social security number. 3. Your filing status cannot be “Married filing separately.” 4. You must be a U.S. citizen or resident alien all year. 5. You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). 6. Your investment income must be $2,800 or less. 7. You must have earned income.	8. Your child must meet the relationship, age, and residency tests. 9. Your qualifying child cannot be used by more than one person to claim the EIC. 10. You cannot be a qualifying child of another person.	11. You must be at least age 25 but under age 65. 12. You cannot be the dependent of another person. 13. You cannot be a qualifying child of another person. 14. You must have lived in the United States more than half of the year.	15. Your earned income must be less than: •$36,348 ($38,348 for married filing jointly) if you have more than one qualifying child, •$32,001 ($34,001 for married filing jointly) if you have one qualifying child, or •$12,120 ($14,120 for married filing jointly) if you do not have a qualifying child.

Social security number. Under Rule 2, you (and your spouse if filling a joint return) must have a valid SSN issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC also must 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.

Investment income. Under Rule 6, you cannot claim the EIC unless your investment income is $2,800 or less. If your investment income is more than $2,800, you cannot claim the credit. For most people, investment income is the total of the following amounts.

Taxable interest (line 8a of Form 1040 or 1040A).
Tax-exempt interest (line 8b of Form 1040 or 1040A).
Dividend income (line 9a of Form 1040 or 1040A).
Capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form 1040A).

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

Earned income. Under Rule 7, you must have earned income to claim the EIC. Under Rule 15, you cannot claim the EIC unless your earned income is less than the applicable limit. Earned income includes all of the following types of income.

Wages, salaries, tips, and other taxable employee pay. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is generally not earned income.
Net earnings from self-employment.
Gross income received as a statutory employee.

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. Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income.

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 under Rule 7 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.

Workfare payments. Nontaxable 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.

Qualifying child. Under Rule 8, your child is a qualifying child if your child meets three tests. The three tests are:

Relationship,
Age, and
Residency.

The three tests are illustrated in Table 5-2. See Publication 596 for more information about each test.

Table 5-2. Tests for Qualifying Child

A qualifying child for the EIC is a child who is your...
Son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew)

was ...
Under age 19 at the end of 2006
or
Under age 24 at the end of 2006 and a student
or
Any age and permanently and totally disabled

who...
Lived with you in the United States for more than half of 2006. If the child did not live with you for the required time, see Publication 596 for more information.
If the child meets the conditions to be a qualifying child of any other person (other than your spouse if filing a joint return) for 2006, or the child was married, see Publication 596 for more information.

Figuring the EIC

To figure the amount of your credit, you have two choices.

Have the IRS figure the EIC for you. If you want to do this, see IRS Will Figure the EIC for You in Publication 596.
Figure the EIC yourself. If you want to do this, see How To Figure the EIC Yourself in Publication 596.

Advance Earned Income Credit Payments

If you have a qualifying child and expect to qualify for the EIC in 2007, 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 2007 by completing a 2007 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 2006, you must file a 2006 return to report payments and to get any additional earned income credit for 2006.

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