Earned Income Credit

The following paragraphs explain the 1998 changes to the earned income credit. For more information, see Publication 596, Earned Income Credit.

Amount of credit. The maximum amount of credit has increased for 1998. The most you can receive is:

• $2,271 with one qualifying child,
• $3,756 with more than one qualifying child, or
• $341 without a qualifying child.

Amount of earned income. The amount you can earn and still get the credit has increased for 1998. The amount you earn must be less than:

• $26,473 with one qualifying child,
• $30,095 with more than one qualifying child, or
• $10,030 without a qualifying child.

Amount of investment income. The maximum amount of investment income you can have and still get the credit has increased for 1998. You can have investment income up to $2,300. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income.

Capital gain net income. For purposes of the earned income credit only, capital gain net income does not include gains from selling business assets. For the earned income credit, capital gain net income is the amount on line 13 of Form 1040 minus any amount on line 9, column (g) of Form 4797, Sales of Business Property. If this capital gain net income is less than zero, disregard it. Do not use it to reduce your other investment income.

This rule, announced in 1998, may also affect your 1996 and 1997 returns. If you had gains from selling business assets that caused you not to take the credit in 1996 or 1997, you can file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, to take the credit for that year.

Modified AGI (adjusted gross income). Beginning in 1998, your modified AGI used to limit your credit now includes the following items.

1. Tax-exempt interest.
2. The nontaxable part of a pension, annuity, or individual retirement arrangement        (IRA) distribution, except any amount that is nontaxable due to a trustee-to-trustee transfer or a rollover distribution.

Also, the amount of business losses that must be added back to AGI to figure modified AGI has increased from 50% to 75%.

Workfare payments. Beginning in 1998, earned income does not include workfare payments. These are cash payments certain families receive from a state or local agency that administers public assistance programs funded under the Federal Temporary Assistance for Needy Families program in return for either of the following activities.

1. Work experience activities (including work associated with remodeling or repairing public housing) if sufficient private sector employment is not available.
2. Community service program activities.
   

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