The following summary can help taxpayers know when they are eligible to claim the EIC and how making use of it can benefit them. For complete Earned Income Credit guidelines, see the IRS Publication 596: Earned Income Credit (EIC).
Qualifications to Claim the Earned Income Credit
There are eight conditions that all taxpayers must meet to be eligible for claiming the Earned Income Credit. First, a taxpayer must meet the AGI (adjusted gross income) Test. Each filing status has a certain income threshold that cannot be crossed. In 2015, a single individual with no qualifying children must have earned less than $12,850 and a couple who filed jointly with no qualifying children must have earned less than $15,850. Single filers with one qualifying child must not have earned more than $33,950 and not more than $38,650 for two qualifying children. Married couples who filed jointly with one qualifying child must not have earned more than $36,950 and not more than $41,646 with two qualifying children. These income thresholds are increased yearly.
To claim the EIC, the taxpayer must also have a valid social security number for himself, his spouse and any children that will be claimed for the purpose of the credit. If a taxpayer is married, he or she must file using the Married Filing Joint status. Returns that are filed under the Married Filing Separately status will not qualify for EIC. Any taxpayer who is considered a Qualifying Child for another taxpayer will not be able to claim the Earned Income Credit on his or her own return.
Another condition for the taxpayer to satisfy before claiming the Earned Income Credit is to be a United States citizen or resident alien for the entire tax year. Illegal immigrants or undocumented aliens will not qualify to claim EIC. The taxpayer must also have earned income during the tax year. If a taxpayer has to file Form 2555 to claim Foreign Earned Income, the taxpayer will be disqualified for the purposes of EIC. Taxpayers with investment income, such as that from property or stock transactions, that exceeds $3,100 will be excluded from claiming the Earned Income Credit.
For taxpayers without Qualifying Children, there are a few additional qualifications to meet. These taxpayers will have to be between the ages of 25 and 65 to claim the credit. Taxpayers without Qualifying Children cannot be the dependents of other taxpayers. These taxpayers must also have lived in the United States for the entire tax year, even if they are U.S. citizens.
To have earned income, the taxpayer must have receive pay in the form of wages, salaries, tips, net self-employment income or gross earnings received as a statutory employee. Money earned while incarcerated, payments from government assistance programs and military housing and subsistence allowances cannot be included as earned income for the purposes of EIC.
Who is a Qualifying Child?
If the taxpayer will be claiming a dependent for the purposes of the Earned Income Credit, this dependent will have to meet three tests to be considered a Qualifying Child. First, the child must meet the Relationship Test. The child must be related to the taxpayer in one of the following ways: a biological child, a stepchild, a foster child, a half-sibling, a step-sibling, or any descendant of these, such as a grandchild or a niece/nephew. This test is to prevent taxpayers from claiming children that they did not care for.
The second test for a Qualifying Child is the Age Test. The child must be under the age of 19 or under the age of 24, if a full-time student. Children who are permanently and totally disabled will qualify, regardless of age. The third test is the Residency Test. The child must have lived with the taxpayer for more than half of the tax year. If the taxpayer’s children will meet the tests to be a Qualifying Child, only three children can be claimed for the purposes of Earned Income Credit. Any additional children can be claimed as dependent exemptions only.
How to Claim the Earned Income Credit
Earned Income Credit is claimed using Schedule EIC in addition to the appropriate 1040 form for the taxpayer’s situation. Schedule EIC is a very short form, only requiring that the child’s name, social security number and year of birth be entered. Questions relating to the residency, relationship, and age tests must also be answered.
After entering this information, Schedule EIC is simply included with Form 1040 or 1040A. Publication 596 contains the Earned Income Credit tables that will stipulate the amount of the credit that can be claimed that tax year. This figure is then entered on Form 1040, Line 64A or on Form 1040A, Line 41A. As the tax return is completed, the Earned Income Credit will be counted as against any tax owed, serving to reduce the tax liability. Any Earned Income Credit in excess of tax owed will be refunded to the taxpayer. If there is no tax owed, the full amount of the credit will be refunded along with any overpayment.
The Earned Income Credit is a very valuable resource for low-income taxpayers. For individuals without Qualifying Children, it can help them to make ends meet. For families who qualify, it can help them to provide needed support for their children. Taxpayers would do well to learn about the EIC requirements and then to discuss the credit with their tax professionals to claim the most credit possible.