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Can I deduct an Earned Income Credit on my tax return?
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| 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.
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Earned Income
Includes The Following:
 | 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 Form W-2 |
| Variable housing allowance for the military |
| Earnings for work performed while an inmate at a
penal institution. |
A Qualifying Child Must:
| be a son, daughter, stepchild, adopted/foster child, brother, sister,
stepbrother, stepsister, or a descendent of any of them (i.e.
grandchild) |
| be under age 19, or under age 24 and a full time
student (enrolled full time during any 5 months) |
| be any age if permanently disabled |
| not provide more than one-half of his or her own
support |
| have lived with the taxpayer for more than 6 months
in the United States, except in the case of newborns and adoption. A
full year is required for foster care |
| have an SSN, unless the child was born and died
during the tax year |
| be younger than the person claiming him/her |
| not have filed a joint tax return other than to
claim a refund |
To Qualify, All Of The Following Tests Must Be
Met:
| the taxpayer must have earned income |
| the taxpayer's filing status cannot be married
filing separately |
| the taxpayer cannot be the qualifying child of
another person |
| the taxpayer must include his SSN on the return,
and if married, that of his spouse |
| earned income and AGI must each be less
than... |
| Number of children |
Single |
Married Filing
Jointly |
| No qualifying children |
$13,440 |
$18,440 |
| One qualifying child |
$35,463 |
$40,463 |
| Two qualifying children |
$40,295 |
$45,295 |
| More than two qualifying
child |
$43,279 |
$48,279 |
Disqualified income
The taxpayer is not eligible for the
earned income credit if he had "disqualified income" exceeding
$3,100. 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.
Claiming The Earned Income Credit Without A
Qualifying Child
If the taxpayer does not have a qualifying child, then the
taxpayer must
| have earned income as detailed above |
| have a main home in the US for more than six months
of the tax year |
| be at least 25 years old, but under age 65, at the
end of the tax year. On joint returns either spouse may satisfy this
test |
| file a joint tax return if married, unless the
taxpayers lived apart for the last six months of the tax year, and
this taxpayer qualifies to file as Head of Household |
| not be the dependent or qualifying child of another
taxpayer. This rule includes a spouse |
| include his SSN on the return, and if married, that
of his spouse |
Tie-Breaker Rules
If both parents are eligible to claim the credit for the same qualifying
child and they do not file a joint return the parent with whom the child
resided for the longer period of time during the tax year claims the
credit. If the child lived with each parent for the same amount of time
the parent with the higher AGI claims the credit.
If a parent and one or more non-parents are entitled
to claim the child as a qualifying child, only the parent may claim the
credit. If none of the persons entitled to claim the child are a parent
the person with the higher AGI claims the credit.
Married Children
If the taxpayer's child was married at the end of the tax year,
he or she can be the taxpayer's qualifying child only if the taxpayer
can claim an exemption for the child.
Nonresident Aliens
An individual who is a nonresident alien for any part of the tax
year is not eligible for the credit unless he or she is married and an
election is made by the couple to have all of their worldwide income
subject to U.S. income tax.
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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. |
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Related tax
information about the Earned Income Credit |
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| Tax Credits |
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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. |
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Ask Julian Block your IRS and tax questions! |
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If you can't find the answer to your IRS or tax question in our
web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax
Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine. To
call Julian for a tax consultation click
here. |
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