Earned Income Credit (EIC)(p28)

The earned income credit (EIC) is a refundable tax credit for certain people who work and have earned income under $49,078. The EIC is available to persons with or without a qualifying child.

Any refund you receive because of the EIC 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. Please check with your state.

• Medicaid and supplemental security income (SSI).
• Supplemental Nutrition Assistance Program (food stamps).
• Low-income housing.
• Temporary Assistance for Needy Families (TANF).
• Any other benefits or assistance under any federal program or under any state or local program financed in whole or in part with federal funds.

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 38a), 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 37 (Form 1040), line 21 (Form 1040A), or line 4 (Form 1040EZ).

Under Rule 2, you (and your spouse if you are married filing jointly) 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 you are married filing jointly) 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 $3,150 or less. If your investment income is more than $3,150, 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 Table 5-1, Part D. 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.

Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate tax return and you lived with your spouse at any time in 2011, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the Instructions for Form 1040, lines 20a and 20b to figure the taxable part of social security benefits you must include in gross income.

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.

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."

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 — except for payments covered under Disability benefits earlier), 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 four tests. The four tests are:

1. Relationship,
2. Age,
3. Residency, and
4. Joint return.

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

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.