Use this Part B if you:

1. Have a qualifying child, and
2. Have met all the rules in Part A.

This part of the chapter discusses rules B-1 through B-3. You must meet all three rules, in addition to the rules in Part A, to qualify for the earned income credit with a qualifying child.

If you meet all the rules in Part A and this part, you must file Form 1040 or Form 1040A to claim the credit. (You cannot file Form 1040EZ). You must also complete Schedule EIC and attach it to your return.

If you do not meet rule B-2, you do not have a qualifying child. Read Part C to find out if you can get the earned income credit.

B-1. Earned Income and Modified AGI (Adjusted Gross Income) Limit

To claim the earned income credit your earned income and modified AGI must each be less than:

• $26,473 if you have one qualifying child, or
• $30,095 if you have two or more qualifying children.

Earned income. Earned income includes all the income you get from working--even if it is not taxable. For examples, see A-1, Earned Income.

If the total of your taxable and nontaxable earned income is $26,473 or more (if you have one qualifying child) or $30,095 or more (if you have more than one qualifying child), print "No" directly to the right of line 59a (Form 1040) or line 37a (Form 1040A).

Modified AGI

Modified AGI for most people is the same as AGI. AGI includes items such as taxable social security benefits and unemployment benefits. AGI is the amount on line 33 (Form 1040), line 18 (Form 1040A), and line 4 (Form 1040EZ). But if you are filing Schedule C, C-EZ, D, E, or F, or if you claim a loss from the rental of personal property not used in a trade or business, get Publication 596 for more information.

B-2. Qualifying Child

You have a qualifying child if your child meets three tests. The three tests are:

1. Relationship,
2. Residency, and
3. Age.

If your child does not meet all three tests of a qualifying child, then you cannot claim the credit for persons with a qualifying child. However, you might qualify for the credit if you do not have a qualifying child and your earned income is under $10,030. See Table 37-1. Earned Income Credit At A Glance, earlier.

Your qualifying child does not necessarily have to be your dependent. But see Married child, later.

Relationship Test

To meet the relationship test, the child must be your:

• Son, daughter, or adopted child (or a descendant of your son, daughter, or adopted child--for example, your grandchild),
• Stepson or stepdaughter, or
• Eligible foster child (this could include a niece, nephew, brother, sister, cousin, etc.).

Adopted child. Your adopted child includes a child placed with you for adoption by an authorized placement agency, even if the adoption is not final.

Eligible foster child. For the earned income credit, a person is your eligible foster child if:

1. The child lived with you and was a member of your household for the whole year, and
2. You cared for that child as you would your own child.

The eligible foster child does not have to be related to you.

Married child. A child who was married at the end of the year does not meet the relationship test, unless you can claim an exemption for the child. However, you do not have to be able to claim the child's exemption, if you meet either of the following exceptions.

1. You cannot claim your child's exemption only because you gave that right to your child's other parent by filling out Form 8332 or a similar written statement.
2. You cannot claim your child's exemption only because you gave that right to your child's other parent in a pre-1985 agreement (such as a separation agreement or divorce decree).

If you need more information about either of these exceptions or when you can claim an exemption for your child, see Publication 501, Exemptions, Standard Deduction, and Filing Information or Publication 504.

Residency Test

To meet the residency test, the child:

1. Must have lived with you for more than half the year (the whole year if the child is an eligible foster child), and
2. The home must be in the United States (one of the 50 states or the District of Columbia).

To meet the residency test, you do not need a traditional home. For example, if your child lived with you for more than half the year in a homeless shelter, the residency test is met.

Military personnel stationed outside the United States. U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for the earned income credit.

Extended active duty. Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you serve less than 90 days.

See Publication 3 Armed Forces' Tax Guide, for more information on claiming the earned income credit.

Birth or death of a child. The child is considered to have lived with you for all of 1998 if both of the following apply.

1. The child was born or died in 1998.
2. Your home was the child's home for the entire time he or she was alive during 1998.

Temporary absences. Count time that you or the qualifying child is away from home on a temporary absence due to a special circumstance as time lived at home. Examples of a special circumstance include:

• Illness,
• Attending school,
• Business,
• Vacation, and
• Military service.

Age Test

To meet the age test, your child must be:

1. Under age 19 at the end of the year,
2. A full-time student under age 24 at the end of the year, or
3. Permanently and totally disabled at any time during the tax year, regardless of age.

Full-time student. A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.

Student defined. To qualify as a student your child must be, during some part of each of 5 calendar months during the calendar year:

1. A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or
2. A student taking a full-time, on-farm training course given by a school described in (1), or a state, county, or local government.

The 5 calendar months need not be consecutive.
 

School defined. The term "school" includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, and night schools. (But see Night school, later.)

Vocational high school students. Students who work on "co-op" jobs in private industry as a part of a school's prescribed course of classroom and practical training are considered full-time students.

Night school. Your child is not a full-time student while attending school only at night. However, full-time attendance at a school may include some attendance at night as part of a full-time course of study.

Permanently and totally disabled. Your child is permanently and totally disabled if both the following apply:

1. He or she cannot engage in any substantial gainful activity because of a physical or mental condition, and
2. A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

B-3. Qualifying Child for More Than One Person

If you and someone else have the same qualifying child, the person with the higher modified AGI is the only one who may be able to claim the credit. The person with the lower modified AGI cannot claim the credit. This is true even if the person with the higher modified AGI does not claim the credit or meet all of the rules to claim the credit.

If three or more persons have the same qualifying child, the person with the highest modified AGI is the only one who may be able to claim the credit.

If you are filing Form 1040 or Form 1040A and cannot claim the earned income credit because of this rule, print "No" directly to the right of line 59a (Form 1040) or line 37a (Form 1040A).

Example 1. You and your son lived with your mother all year. You are 25 years old. Your only income was $9,300 from a part-time job. Your mother's only income was $15,000 from her job.

Your son is a qualifying child of both you and your mother. However, because you both have the same qualifying child, only one of you can claim the credit. Because your mother's modified AGI ($15,000) is more than your modified AGI ($9,300), only your mother can claim the earned income credit. You cannot claim the credit either with or without a qualifying child.

Example 2. The facts are the same as in Example 1, except that your mother's modified AGI is $40,000.

Your mother cannot claim the earned income credit because her modified AGI is more than $26,473. (See rule B-1.) Even though your mother cannot claim the earned income credit, you cannot claim the credit either, because your mother's modified AGI is more than yours.

Example 3. You and your sister shared a household for the entire year. You have 3 young children who lived in the household. Your sister does not have any children. However, she cares for your children as if they were her own. You earn $15,000 and she earns $20,000.

The children meet the age and residency tests for both you and your sister. They meet the relationship test for you because they are your children. They also meet the relationship test for your sister because they lived with her in the same household for the whole year and she cared for them as if they were her own. Therefore, they qualify as her eligible foster children.

Your children are qualifying children for both you and your sister. However, because your sister's modified AGI is higher than yours, she is the only one who can claim the credit.

You and your sister cannot split the three qualifying children between you. You cannot claim the credit even though your sister enters the names of only two of the children on her Schedule EIC.

Example 4. You, your spouse, and your son lived together until July 15, 1998, when your spouse moved out of the household. In November 1998, you and your spouse were divorced. Your modified AGI was $13,000. Your former spouse's modified AGI was $18,000. Your son is a qualifying child of both you and your former spouse, because your son lived with each of you for more than half the year. However, because your former spouse's modified AGI ($18,000) was more than your modified AGI ($13,000), only your former spouse can claim the earned income credit for 1998.

If the other person is your spouse and you file a joint return, rule B-3 does not apply.

Unmarried couples living together. If an unmarried couple lives together with a qualifying child of both persons, the person with the higher modified AGI is the only one who may be eligible to claim the credit. The person with the lower modified AGI cannot claim the credit either with or without a qualifying child.

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