Earned Income Credit
The earned income credit (EIC)Earned Income Credit (EIC)Credit designed to help the lower income working taxpayers; credit can exceed the tax liability making it a “refundable” credit. is available to qualifying individuals with earned income and AGI below certain levels (amounts change annually). For example, for tax year 2008, the credit ranges from $438 to $4,824 for taxpayers with earned income less than $41,646. The EIC is meant to assist the working poor. Taxpayers with “disqualified income” (certain types of investment income) exceeding $2,950 in 2008 are not allowed to claim the EIC. The EIC is refundable. That is, the taxpayer can claim the credit and receive a refund equal to the amount of the credit, even if no tax is owed to the federal government. The credit in effect produces a “negative” income tax.
The formula for calculating the credit depends on the AGI of the taxpayer and the number of qualifying children. The IRS issues an EIC table to assist taxpayers in computing the credit (the tables are available on the IRS Web site and in the instruction booklet for Form 1040). To compute the credit, the taxpayer must fill in a form calculating the credit from the tables based on earned income from wages, salaries, and self-employment income and the credit based on AGI if that amount is different. The smaller of the two credits calculated will be the credit allowed.
To be eligible for the credit with no qualifying children, a worker must be over 25 and under 65 years old and not be claimed as a dependent by another taxpayer. There is no age requirement for taxpayers with qualifying children. Also, married taxpayers must file a joint return in order to receive any earned income credit. A qualifying child must generally meet the tests to be a qualifying child as discussed in Chapter 2, The Federal Income Tax Return of this text, with some special variations primarily related to support and divorced taxpayers.
Go to Publication 17 and read Chapter 36: Earned Income Credit.
Question and Problems
Assuming they all meet the income requirements, which of the following taxpayers qualify for the earned income credit?
A married taxpayer filing separately with a dependent child
A single taxpayer who waited on tables for three months of the tax year and is claimed as a dependent by her mother
A self-employed single taxpayer with a dependent child
Both a. and c. above
None of the above qualify for the earned income credit
Kathy is a single taxpayer who qualifies for the earned income credit. She has two qualifying children who are 2 and 4 years old. During 2008, Kathy’s wages are $17,100 and she receives dividend income of $100. Calculate her EIC using the Earned Income Credit Table in the Form 1040 Instructions. $__________
Kellin and Klaus are married and file a joint income tax return. They have two dependent children, Laura, age 3 (Social Security number 123-42-3148), and Lea, age 1 (Social Security number 123-13-1748). Kellin’s wages are $5,000 and Klaus’s wages were $13,000. In addition, they received interest income of $100 and have no other items of income and do not have any deductions for AGI. Complete Schedule EIC, the Earned Income Credit Worksheet for Kellin and Klaus. Their credit will be: $__________
