EARNED INCOME CREDIT

What is the earned income credit?

• The earned income credit (EIC) is a special credit for taxpayers who have earnings from services they perform as an employee or self-employed individual.

What is the amount of the credit?

• The amount of the credit depends on your earned income and modified adjusted gross income and the number of qualifying children. If you have one qualifying child and 1997 income of less than $25,760, or two qualifying children and 1997 income of less than $29,290, you may be eligible for the credit. If you have no qualifying children, you may be eligible for the credit if your income is less than $9,770. However, you cannot claim the credit if you have a total of more than $2,230 of investment income, including such amounts as interest, dividends and gains from the sale of investment property.
• The maximum credit for taxpayers with one qualifying child is $2,210; the maximum credit for taxpayers with two or more qualifying children is $3,656. Single and married taxpayers between ages 25 and 65 with no qualifying children are eligible for a maximum credit of $332.

How do you know if your child is a qualifying child?

Your child is a qualifying child if he or she meets three tests:

• Your child meets the relationship test if he or she is your son, daughter, adopted child, grandchild, stepchild or eligible foster child. An eligible foster child is a child who lived with you and was a member of your household for the entire year, and whom you cared for as your own. If your child is married, you generally must claim him or her as your dependent.
• Your child meets the residency test if he or she lived with you in your main home for more than six months during the year (twelve months for a foster child) and your home is in the United States, or you are stationed overseas on active military duty.
• Your child meets the age test if he or she is:
  • Under age 19 at the end of the year,
  • A full-time student under age 24 at the end of the year, or
  • Permanently and totally disabled at any time during the year, regardless of age.

Do other qualifying rules apply?

• If you are a qualifying child of another person (for example, your mother or father), then you cannot claim the earned income credit, regardless of the number of qualifying children you have.
• If you and someone else have the same qualifying child, then only the taxpayer with the higher adjusted gross income may be eligible to claim the credit for that child.

What other eligibility rules apply?

If you were a nonresident alien for any part of the year, you are not eligible for the credit unless you are married and elect to file a joint tax return with your U.S. citizen or resident spouse. In addition, resident aliens cannot qualify for the credit unless they are authorized to work in the United States.

How can you claim the credit?

If eligible, you must file a tax return and compute the credit using a worksheet and table in the Schedule EIC instructions. In addition, you must complete Schedule EIC if you have one or more qualifying children. You will receive the credit even if you owe no tax or if the credit is more than the tax you owe.

When can you receive the credit?

If you're eligible for the credit because you have at least one qualifying child, you may be able to receive a portion of the credit as a regular part of your pay. You may not have to wait until you file your tax return.

How do you arrange to receive your earned income credit in advance?

Ask your employer for Form W-5, complete it, and return it to your employer. If you are married, you must file a joint return with your spouse to claim the credit. Therefore, you must take into account your spouse's income when you consider requesting the advance earned income credit. It's possible that your combined incomes may make you ineligible for the credit.

What happens if you are not eligible for the credit after you have received earned income payments in advance?

You'll need to pay back any amount you receive that is more than the credit you are eligible to claim. You'll make this payment with your tax return for the year for which you received advance payments. In fact, you'll need to file a return for any year during which you received advance payments even if you do not need to pay back part or all of the credit.

Are there other facts you need to know regarding advance payments?

You'll receive a smaller refund when you file your tax return for the year in which you received the advance earned income credit.

The total amount of your earned income credit stays the same as if you had not received advance payments. You'll simply receive payments throughout the year rather than all at once at the end of the year.

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