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taxmap/wpubs/p596-010.htm#TXMP3c512f9c Chapter 4 Figuring and Claiming the EIC

Earned Income Credit

You must meet one more rule to be eligible to claim the EIC.

You need to know the amount of your earned income to see if you meet the rule in this chapter. You also need to know that amount to figure your EIC.

taxmap/wpubs/p596-010.htm#TXMP53561527 Rule 15. Your Earned Income Must Be Less Than:(p22)

Your Earned Income Must Be Less Than:

• $37,783 ($39,783 for married filing jointly) if you have more than one qualifying child,
• $33,241 ($35,241 for married filing jointly) if you have one qualifying child, or
• $12,590 ($14,590 for married filing jointly) if you do not have a qualifying child.

taxmap/wpubs/p596-010.htm#TXMP784cd14e Earned Income(p22)

Earned Income

Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Earned income is explained in detail in Rule 7 in chapter 1.

taxmap/wpubs/p596-010.htm#TXMP4dd50edd Figuring earned income.(p22)

If you are self-employed, a statutory employee, or a member of the clergy or a church employee who files Schedule SE (Form 1040), you will figure your earned income when you fill out Part 4 of EIC Worksheet B in the Form 1040 instructions.

Otherwise, figure your earned income by using the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b or the Form 1040A instructions for lines 40a and 40b, or the worksheet in Step 2 of the Form 1040EZ instructions for lines 8a and 8b.

When using one of those worksheets to figure your earned income, you will start with the amount on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). You will then reduce that amount by any amount included on that line and described in the following list.

• Scholarship or fellowship grants not reported on a Form W-2. A scholarship or fellowship grant that was not reported to you on a Form W-2 is not considered earned income for the earned income credit.
• Inmates. Amounts received for work performed while an inmate in a penal institution are not earned income for the earned income credit. This includes amounts received for work performed while in a work release program or while in a halfway house. If you received any amount for work done while an inmate in a penal institution and that amount is included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put "PRI" and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ).
• Deferred compensation plans. A pension or annuity from a nonqualified deferred compensation plan or a nongovernmental section 457 plan is not considered earned income for the earned income credit. If you received such an amount and it was included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put "DFC" and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ). This amount may be reported in box 11 of your Form W-2. If you received such an amount but box 11 is blank, contact your employer for the amount received as a pension or an annuity.

taxmap/wpubs/p596-010.htm#TXMP653486f2 Clergy.(p23)

If you are a member of the clergy who files Schedule SE and the amount on line 2 of that schedule includes an amount that was also reported on line 7 (Form 1040), subtract that amount from the amount on line 7 (Form 1040) and enter the result in the first space of the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b. Put "Clergy" on the dotted line next to line 66a (Form 1040).

taxmap/wpubs/p596-010.htm#TXMP42b048ee Church employees.(p23)

A church employee means an employee (other than a minister or member of a religious order) of a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes. If you received wages as a church employee and included any amount on both line 5a of Schedule SE and line 7 (Form 1040), subtract that amount from the amount on line 7 (Form 1040) and enter the result in the first space of the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b.

taxmap/wpubs/p596-010.htm#TXMP2632a56f Nontaxable combat pay.(p23)

You can elect to include your nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q.Combat pay election extended to taxable years ending after December 31, 2007.

Electing to include nontaxable combat pay in earned income may increase or decrease your EIC. Figure the credit with and without your nontaxable combat pay before making the election. Whether the election increases or decreases your EIC depends on your total earned income, filing status, and number of qualifying children. If your earned income without your combat pay is less than the amount shown below for your number of children, you may benefit from electing to include your nontaxable combat pay in earned income and you should figure the credit both ways. If your earned income without your combat pay is equal to or more than these amounts, you will not benefit from including your combat pay in your earned income.

• $5,550 if you have no children.
• $8,350 if you have one child.
• $11,750 if you have two children.

The following examples illustrate the effect of including nontaxable combat pay in earned income for the EIC.

taxmap/wpubs/p596-010.htm#TXMP3e0932f8
Example 1 – election increases the EIC.(p23)

George and Janice are married and will file a joint return. They have one qualifying child. George was in the military and earned $15,000 ($5,000 taxable wages + $10,000 nontaxable combat pay). Janice worked part of the year and earned $2,000. Their taxable earned income and AGI are $7,000. George and Janice qualify for the earned income credit and fill out the EIC Worksheet and Schedule EIC.

When they complete the EIC worksheet without adding the nontaxable combat pay to their earned income, they find their credit to be $2,389. When they complete the EIC worksheet with the nontaxable combat pay added to their earned income, they find their credit to be $2,853. Because making the election will increase their EIC, they elect to add the nontaxable combat pay to their earned income for the EIC. They enter $2,853 on line 40a of their Form 1040A and enter the amount of their nontaxable combat pay on line 40b.

taxmap/wpubs/p596-010.htm#TXMP1743164d
Example 2– election does not increase the EIC.(p23)

The facts are the same as Example 1 except George had nontaxable combat pay of $22,000. When George and Janice add their nontaxable combat pay to their earned income, they find their credit to be $993. Because the credit they can get if they do not add the nontaxable combat pay to their earned income is $2,389, they decide not to make the election. They enter $2,389 on line 40a of their Form 1040A.

taxmap/wpubs/p596-010.htm#TXMP2cbfc4fb IRS Will Figure the EIC for You(p24)

IRS Help Available, EIC

The IRS will figure your EIC for you if you follow the instructions in Figure 3, below.

Please do not ask the IRS to figure your EIC unless you are eligible for it. To be eligible, you must meet Rule 15 in this chapter as well as the rules in chapter 1 and either chapter 2 or chapter 3, whichever applies to you. If your credit was reduced or disallowed for any year after 1996, the rules in chapter 5 may apply as well.

taxmap/wpubs/p596-010.htm#f15173a15

Figure 3. Steps To Follow To Have the IRS Figure Your EIC

taxmap/wpubs/p596-010.htm#TXMP758a5b7e

Earned Income Credit On Figure 3. Steps To Follow To Have the IRS figure Your EIC.  

Previous Page:  Publication 596 - Earned Income Credit - Rules If You Do Not Have a Qualifying Child Next Page:  Publication 596 - Earned Income Credit - How To Figure the EIC Yourself Use   to find additional occurrences of topic items.