Earned Income Credit(p29)

The earned income credit (EIC) is a refundable tax credit for certain people who work and have earned income under $41,646. The EIC is available to persons with or without a qualifying child.

Any refund you receive because of the EIC and any advance EIC payments you receive generally will not be considered income when determining whether you are eligible for the following benefit programs, or how much you can receive from the programs. However, if the amounts you receive are not spent within a certain period of time, they may count as an asset (or resource) and affect your eligibility.

• 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.

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.

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.

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 64a), Form 1040A (line 40a), or Form 1040EZ (line 8a).

Under Rule 1, you cannot claim the EIC unless your AGI is less than the applicable limit shown in Part A of Table 5-1. Your AGI is the amount on line 38 (Form 1040), line 22 (Form 1040A), or line 4 (Form 1040EZ).

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

Under Rule 6, you cannot claim the EIC unless your investment income is $2,950 or less. If your investment income is more than $2,950, 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.

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 shown in Part D of Table 5-1. Earned income includes all of the following types of income.

1. 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.
2. Net earnings from self-employment.
3. Gross income received as a statutory employee.

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."

If your main home was in a Midwestern disaster area when the disaster occurred and your 2008 earned income is less than your 2007 earned income, you may be able to elect to use your 2007 earned income to figure your 2008 earned income credit. For details, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

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.

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.

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

1. Relationship,
2. Age, and
3. Residency.

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

A qualifying child for the EIC is a child who is your...

Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild)

OR

Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, your niece or nephew)

was ...

Under age 19 at the end of 2008

OR

Under age 24 at the end of 2008 and a student

OR

Permanently and totally disabled at any time during the year, regardless of age

who...

Lived with you in the United States for more than half of 2008. If the child did not live with you for the required time, see Publication 596 for more information.

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

1. 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.
2. Figure the EIC yourself. If you want to do this, see How To Figure the EIC Yourself in Publication 596.

If you have a qualifying child and expect to qualify for the EIC in 2009, 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 2009 by completing a 2009 Form W-5. See Publication 596 or the Form W-5 instructions for more information on the advance EIC.