Earned income credit (EIC).
For 2012, the maximum amount of income you can earn and still claim the EIC has increased. You may be able to take the EIC if you earned less than $45,060 ($50,270 for married filing jointly) and you have three or more qualifying children; $41,952 ($47,162 for married filing jointly) and you have two qualifying children; $36,920 ($42,130 for married filing jointly) and you have one qualifying child; and $13,980 ($19,190 for married filing jointly) and you do not have any qualifying children.


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:

  • 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

$13,980

$19,190

One qualifying child

$36,920

$42,130

Two qualifying children

$41,952

$47,162

More than two qualifying child

$45,060

$50,270

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.

 


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.
 


 Home | Personal Tax | Business Tax | Payroll | Other Services | Contact us