Publication 596 - Earned Income Credit - Example 3. Steve and Linda Green

Publication 596

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Example:(p38) Steve and Linda Green have two children, a loss from a dairy farm, and a net capital gain from selling cows.

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 2011. 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 $4,480 on Schedule SE, Section B, lines 15 and 4b. Steve figures self-employment tax of $596. He deducts $343 of it on Form 1040, line 27.

Linda had wages of $19,000, which she reports on Form 1040, line 7. In addition, she and Steve received $200 in interest from a savings account, and $1,500 of their state income tax refund was taxable.

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 Form 4797, line 7, and on Schedule D, line 11. (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 64a and 64b. 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 $3,150 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 later) in Publication 596. They find their correct investment income for EIC purposes to be $1,200, not $4,200. This is less than $3,150, 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 $22,157 ($19,000 + $4,000 + $200 + $1,500 - $2,200 - $343) is less than $46,044 ( Rule 1).

They use EIC Worksheet B (shown later) to figure their EIC of $4,827. They also complete Schedule EIC (not shown) and attach it to their Form 1040.

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Filled in Worksheet 1 for Steve and Linda Green

Use this worksheet to figure investment income for the earned income credit when you file 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. (If your child received an Alaska Permanent Fund dividend, use Worksheet 2, in this chapter, to figure the amount to enter on this line.)			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 23d, plus any income from the rental of personal property shown on Form 1040, line 21.	8.
9.	Enter any expenses from Schedule E, line 20, 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 (such as income included on Schedule E, line 26, 29a (col. (g)), 34a (col. (d)), or 40). (See instructions below for lines 11 and 12.)	11.
12.	Enter the total of any losses from passive activities (such as losses included on Schedule E, line 26, 29b (col. (f)), 34b (col. (c)), or 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 $3,150? □ Yes. You cannot take the credit. ☑ No. Go to Step 3 of the Form 1040 instructions for lines 64a and 64b 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 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.

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Filled-in EIC Worksheet B — Steve and Linda Green (Page references are to the Form 1040 Instructions)

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Greens' EIC Worksheet B, page 1

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Filled-in EIC Worksheet B — Steve and Linda Green (Page references are to the Form 1040 Instructions)

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Greens' EIC Worksheet B, page 2

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Example 3. Steve and Linda Green(p38)