ACC MISC : Chapter 5 Lecture.pdf - Chapter 5: Earned Income Credit...

The taxpayer must have earned income to be eligible for the “earned income credit.” Earned income is income the taxpayer received for working, even if it is not taxable. If the taxpayer is filing a joint return, the taxpayer meets the requirement for earned income if at least one spouse worked and had earned income. Listed in the chart below are items of income that are considered earned income and items that are not considered earned income (for purposes of the EIC). If you work as a statutory employee or are self-employed, then you will figure your earned income on EIC Worksheet B located in the Form 1040 instructions. Examples of Earned and Unearned Income for Purposes of EIC Includes * Does Not Include * Taxable Earned Income (Enter on Form 1040 EIC worksheet, Step 5) Interest and dividends Wages, salaries, tips Social Security and Railroad Retirement benefits Long-term disability benefits received prior to minimum retirement age Welfare benefits (including Aid to Families with Dependent Children (AFDC) payments) Union strike benefits Workfare payments Net earnings from self-employment (Enter on Form 1040 EIC Worksheet B, Part 1) Pensions and annuities Gross income received as a statutory employee Veterans benefits, including VA rehabilitation payments Nontaxable foster care benefits Alimony Earnings for work performed while an inmate at a penal institution, including amounts received through work release programs or while in a halfway house Workers’ compensation benefits Child support Unemployment compensation Nonqualified deferred compensation plan or a Section 457 plan, pension or annuity Community property Nontaxable military pay *The taxpayer has the option of including nontaxable combat pay in earned income for purposes of the earned income credit calculation. Nontaxable Combat Pay Election Nontaxable pay for members of the Armed Forces is not considered earned income for the EIC. The taxpayer may choose to include nontaxable military pay in earned income for purposes of the EIC. Electing to include nontaxable combat pay in earned income may increase or decrease the EIC. Figure the credit with and without the nontaxable combat pay before making the election. If the taxpayer makes the election, then he must include all nontaxable combat pay he received in earned income. If the taxpayer is filing a joint return and both he and his spouse received nontaxable combat pay, each can make their own election independently of the other. For example, one spouse can make the election to include their combat pay while the other spouse can choose to either include or not include their nontaxable combat pay. The taxpayer’s nontaxable combat pay can be found on his Form W-2, box 12, with code Q. Minister’s Housing If the taxpayer is a minister and receives a housing allowance, then the rental value of the home/housing allowance is not generally subject to income tax. It is, however, included in net earnings from self-employment. It is included in earned income for the EIC. Statutory Employee The taxpayer is a statutory employee if he receives a Form W-2 that has box 13 (Statutory employee) checked. Statutory employees report income and expenses on Schedule C. A taxpayer who is a statutory employee determines eligibility for the EIC based on his or her net earnings on Schedule C. Strike Benefits If the taxpayer receives strike benefits paid by a union, then those benefits are considered earned income for purposes of calculating the EIC. Disability Benefits If the taxpayer retired on disability, until he or she reaches minimum retirement age, taxable benefits received under his or her employer’s disability retirement plan are counted as earned income. The “minimum retirement age” is defined as the earliest age at which an individual could have received a pension or annuity if he or she were not disabled. Any disability payments that a taxpayer receives are taxable and reportable on line 1 of Form 1040 until the taxpayer reaches the minimum retirement age. Beginning on the day after the taxpayer reaches the minimum retirement age, any disability payments that he or she receives are taxable as pension payments and are reported on Form 1040 on lines 5a or 5b. However, these payments are no longer considered earned income for purposes of calculating the EIC. If a taxpayer receives disability insurance from a policy that he or she paid premiums for, such payments are not considered when calculating the EIC. This is true regardless of whether the individual has reached minimum retirement age. Community Property Community property generally describes jointly owned assets of married couples. Each state has its own specific guidelines used to determine what is considered property as opposed to what is considered separate property. Generally, community property includes any property that: • Is acquired by one spouse (or registered domestic partner) or the other during their marriage (or domestic partnership) while domiciled in a community property state. • Is converted from separate property to community property upon agreement of the spouses or registered domestic partners. • Is not able to be identified as separate property. Community income includes: • Income from community property. • Wages, salary, or any income received from services performed by one spouse (or registered domestic partner) or the other during their marriage (or registered domestic partnership) while domiciled in a community property state. On the other hand, separate property generally includes any property that: • Is owned separately by either of the spouses (or registered domestic partners) before their marriage (or registered domestic partnership). • Is received separately as a gift or inheritance by either of the spouses (or registered domestic partners) during their marriage (or registered domestic partnership). • Is purchased using separate funds by either of the spouses (or registered domestic partners) during their marriage (or registered domestic partnership). • Is converted from community property to separate property through a valid agreement. Separate income generally includes: • Income generated from separate property. • Income earned while domiciled in a noncommunity property state. If the taxpayer is married, qualifies to file as Head of Household, and lives in a community property state, his or her earned income for purposes of EIC does not include any amount earned by his or her spouse that is normally treated as belonging to the spouse under those laws. Even though the taxpayer must include it in his or her gross income on his federal tax return, the amount is not earned income for purposes of EIC. The taxpayer’s earned income includes the entire amount he or she earned, even if part of it is treated as belonging to his spouse under the state’s community property laws. Nevada, Washington, and California domestic partners The same rules apply if the taxpayer is a registered domestic partner in the states of Nevada, Washington, or California. The taxpayer’s earned income for purposes of the EIC does not include any income earned by his partner. The taxpayer’s earned income includes the entire amount the taxpayer earned. To be eligible to claim the EIC, the taxpayer must meet all the rules explained in the “Earned Income Credit Rules” charts on the following pages. No For Married Filing Jointly taxpayers, is AGI less than: 1) $27,380 – without a qualifying child 2) $48,108 – with 1 qualifying child 3) $53,865 – with 2 qualifying children 4) $57,414 – with 3 or more qualifying children. OR For other filing status taxpayers, is AGI less than: 1) $21,430– without a qualifying child 2) $42,158 – with 1 qualifying child 3) $47,915 – with 2 qualifying children 4) $51,464 – with 3 or more qualifying children Yes No Yes No Is the taxpayer a U.S. citizen or resident alien all year? Yes Is the taxpayer filing Form 2555 (related to foreign earned income)? No Is the taxpayer’s investment income $10,000 or less? Yes No Does the taxpayer have earned income? Yes