Example 4. Victor and Ida Brown(p40)

Victor and Ida Brown have two children, Kevin, age 15, and Ashley, age 14. The children lived with Victor and Ida for all of 2010. 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 2010.

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 56, 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 64a and 64b, 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 $45,373 (Step 1, question 1). Their investment income ($200 interest income from a savings account) is less than $3,100 (Step 2). Both of their children are qualifying children (Step 3, question 1).

Because Victor is a member of the clergy, the Browns use EIC Worksheet B in the Form 1040 instructions (shown on pages 39 and 40) to figure their earned income credit.

Victor and Ida enter $23,000 on line 1a. This amount, from Section A, line 3, of Victor's Schedule SE, consists of his $17,000 salary plus his $6,000 housing allowance. After completing lines 1a–1e, they enter $21,375 on line 1f.

They skip parts 2 and 3.

On line 4a, they enter $10,000. They figured this amount in Step 5 of the Form 1040 instructions for lines 64a and 64b. They started with the amount on line 7 (Form 1040), $27,000 ($17,000 + $10,000), and subtracted the amount on that line that was also reported on line 2 of Schedule SE, Victor's $17,000 salary. On line 4b, they enter $31,375 ($21,375 + $10,000). This is their total earned income. Since it is less than $45,373, they go to Part 5 and enter $31,375 on line 6.

They complete Parts 5 through 7 and figure their earned income credit of $2,948. They enter this amount on line 64a of Form 1040 and put "Clergy" on the dotted line next to line 64a.