Can I deduct an Earned Income Credit on my tax return?

The earned income credit is a special credit which lower income workers can deduct on their tax return. The earned income credit can be claimed on a tax return not only by workers with qualifying children, but also by workers with no children under certain circumstances. The earned income credit reduces the amount of tax you owe (if any) on your tax return and is intended to offset some of the increases in living expenses and social security tax. The earned income credit is not a tax deduction; it is subtracted directly from the amount of tax you owe on your tax return, so you end up paying less tax and you may get some money back from the government. Even if you had no tax withheld or do not owe any tax to the IRS on your tax return, you might still get some money back because the earned income credit is a "refundable credit".

The earned income credit can be claimed on Form 1040EZ, however, several requirements must be met. If you do not meet all of them, you must use Form 1040A or Form 1040. For additional information on the tax requirements, refer to Tax Topic 352, Which Form - 1040, 1040A or 1040EZ.

EARNED INCOME INCLUDES THE FOLLOWING:

TAXABLE EARNED INCOME

	Wages, salaries, and tips
	Commissions
	Jury Duty pay

	Union strike benefits
	Long-term disability pensions received prior to minimum retirement age
	Net earnings from self employment

EARNED INCOME DOES NOT INCLUDE THE FOLLOWING:

	Interest and dividends
	Social security and railroad retirement benefits
	Welfare benefits
	Pensions or annuities
	Veterans' benefits (including VA rehabilitation payments)
	Workers' compensation benefits
	Alimony
	Child support
	Unemployment compensation (insurance)
	Taxable scholarship or fellowship grants that were not reported on IRS Tax Form W-2
	Variable housing allowance for the military
	Earnings for work performed while an inmate at a penal institution.

YOU MAY CLAIM THE EARNED INCOME CREDIT WITH QUALIFYING CHILDREN IF:

	you have earned income and modified adjusted gross income of under $34,001 MFJ if you have one qualifying child, or under $38,348 MFJ if you have two or more qualifying children;
	your qualifying child lived with you in your main home in the U.S. for more than six (6) months of the tax year;
	you file Tax Schedule EIC with your tax return;
	you are not a qualifying child of another person;
	you file a joint tax return if married. You may be able to claim the earned income credit as head of household if you lived apart from your spouse for the last half of the tax year;
	you include your social security number on your tax return, and that of your spouse if you are married.

YOU MAY CLAIM THE EARNED INCOME CREDIT WITHOUT QUALIFYING CHILDREN IF:

	you have earned income and modified adjusted gross income of under $14,120 MFJ;
	you have your main home in the U.S. for more than six (6) months of the tax year;
	you are at least 25 years old but less than 65 years old at the end of the tax year. Either you or your spouse must satisfy the age test if you are filing a joint tax return;
	you are not a dependant of another taxpayer;
	you are not a qualifying child of another taxpayer;
	you file a joint tax return if married;
	you include your social security number on your IRS tax return, and that of your spouse if you are married.

Earned Income Credit - Disqualified income

You are not eligible for the earned income credit if you have "disqualified income" exceeding $2,800. Disqualified income includes both taxable and tax exempt interest, dividends, net rent and royalty income, net capital gains, and net passive income that is not self employment income.

Earned Income Credit - Advance Earned Income Credit

If you expect to qualify for the earned income credit in 2008, you may be able to start getting part of the earned income credit with your pay in 2007, instead of waiting until you file your 2007 tax return in 2008. This is called the Advance Earned Income Credit or AEIC.

To get part of the earned income credit with your pay, you must have at least one qualifying child, and meet certain other tax conditions. You cannot get the Advance Earned Income Credit if you do not have a qualifying child, even if you will be eligible to claim the earned income credit on your 2007 tax return. To see if you qualify, see Form W-5, Earned Income Credit, or IRS Publication 596, Earned Income Credit. Additional information on the Advance Earned Income Credit is also available in Tax Topic 604.

Earned Income Credit - Penalties

A taxpayer can get in a lot of trouble for claiming the earned income credit when he/she is not entitled to it. If the IRS determines that the earned income credit was claimed recklessly or in disregard of the tax rules the earned income credit will be disallowed for two (2) years from the tax year for which the IRS's determination is made. If the earned income credit is claimed fraudulently it is disallowed for ten (10) years from the most recent tax year from which it is found by the IRS to be fraudulent.

Related tax information about the Earned Income Credit

Tax Directory Topics:
Tax Credits

IRS publications about the Earned Income Credit:
For more details about the earned income credit including who is a qualifying child, special rules regarding the permanently and totally disabled, foreign earned income, members of the armed forces, credit phase outs, self employed persons, nonresident aliens, and other special rules, requirements, and conditions, see Tax Topic 601, Earned Income Credit, or IRS Publication 596,

Earned Income Credit. Also see IRS Publication 17,

Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.

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