||2008 Tax Year
The next few pages contain four detailed examples (with a filled-in Schedule EIC and EIC Worksheets) that may be helpful if
you have questions
about claiming the EIC.
Example 1. Cynthia and Jerry Grey
Cynthia and Jerry Grey have two children, Kirk, age 8, and Susanne, age 6. The children lived with Cynthia and Jerry for all
of 2007. Cynthia
earned wages of $15,000 and Jerry had wages of $10,000. The Greys received $525 in interest on their savings account. They
had no other income in
Cynthia and Jerry have the 2007 Form 1040A and instructions. They want to see if they qualify for the EIC, so they follow
the steps in the
instructions for lines 40a and 40b.
The amount Cynthia and Jerry entered on Form 1040A, line 22, was $25,525. They both have valid social security numbers
(SSNs). They will file a
joint return. Neither Cynthia nor Jerry is a nonresident alien. Therefore, the answers they give to the questions in Step 1
allow them to
proceed to Step 2
The only investment income the Greys have is their $525 interest income. That amount is not more than $2,900, so they
” to the
second question in Step 2
and go to Step 3
Their children, Kirk and Susanne, meet the relationship, residency, and age tests to be Cynthia and Jerry's qualifying
children, so Cynthia and
Jerry answer “Yes
” to the first question in Step 3
. Kirk and Susanne are not qualifying children of anyone else. Both children have
valid SSNs. Cynthia and Jerry are not qualifying children of anyone else, so they answer “No
” to the second question in Step 3
means they can skip Step 4
and go to Step 5
Cynthia and Jerry figure their earned income to be $25,000, the amount of their combined wages. This is less than
$39,783, so they go to Step
to figure their credit.
Cynthia and Jerry want to figure their EIC themselves, so they complete the EIC Worksheet in the Form 1040A instructions
(shown on page 33).
Completing the EIC Worksheet.
Cynthia and Jerry complete their worksheet as follows.
Cynthia and Jerry enter their total earned income ($25,000) on line 1.
To find their credit, they go to the EIC Table (in the Appendix of this publication). The part of the EIC Table used in this
example is on the next page. They find their earned income of $25,000 in the range of $25,000 to $25,050. They follow this
line across to the column
Two children under Married filing jointly and find $3,108. They enter $3,108 on line 2.
They enter on line 3 their AGI ($25,525) and see that it is different from the amount on line 1.
They look up $25,525 in the EIC Table and enter the amount of $3,003 on line 5.
They enter $3,003 on line 6. This is the smaller of the line 2 amount ($3,108) and the line 5 amount ($3,003).
The Greys enter $3,003 on line 40a of their Form 1040A. They will now complete Schedule EIC (shown on page 34) and attach
it to their
return. They will keep the EIC Worksheet for their records.
Sharon Rose is age 63 and retired. She received $7,000 in social security benefits during the year and $7,300 from a part-time
job. She also
received a taxable pension of $5,400. Sharon had no other income. Her AGI on line 22 of Form 1040A is $12,700 ($7,300 + $5,400).
Sharon is not married and lived alone in the United States for the entire year. She cannot be claimed as a dependent on anyone
else's return. She
does not have any investment income and does not have a qualifying child.
Sharon reads the steps for eligibility in her Form 1040A instructions. In Step 1 she discovers that, because her AGI ($12,700) is not
less than $12,590, she cannot take the EIC. She completes the rest of her Form 1040A and files it with the IRS.
Example 3. Steve and Linda Green
Steve and Linda Green have two children, Amy, age 8, and Carol, age 10, who lived with them all year.
Steve owns and operates a dairy farm that had a loss of $2,200 in 2007. Steve reports this loss on Schedule F and on Form
1040, line 18. Steve
qualifies and chooses to use the optional method to figure net earnings, so he uses Section B of Schedule SE. He enters $1,600
on Schedule SE, Section
B, lines 15 and 4b. Steve figures self-employment tax of $244. He deducts one-half of it ($122) on Form 1040, line 27.
Linda had wages of $15,000, which she reports on Form 1040, line 7. She also received advance EIC payments of $1,140, which
she reports on Form
1040, line 61. In addition, she and Steve received $200 in interest from a savings account.
Steve and Linda had a $1,000 gain from the sale of stock and a $3,000 gain from the sale of raised dairy cows they had held
for 3 years. They
report the $3,000 gain on Form 4797, Sales of Business Property. They do not have any other sales to report on Form 4797,
so they enter $3,000 on Form
4797, line 7, and on Schedule D, line 11. (They have no prior year section 1231 losses.) They report their net capital gain
of $4,000 ($1,000 +
$3,000) from Schedule D on Form 1040, line 13.
The Greens read the instructions for Form 1040, lines 66a and 66b. In Step 2 they figure their investment income to be $4,200 ($200
interest income from Form 1040, line 8a, plus a $4,000 capital gain from Form 1040, line 13). But when they read the second
and third questions in
Step 2 they find that, because they have figured their investment income to be more than $2,900 and they are filing Form 4797, they
use Worksheet 1 in Publication 596 to see if they can take the EIC.
The Greens fill out Worksheet 1 (shown on page 36) in Publication 596. They find their correct investment income for EIC purposes
to be $1,200, not
$4,200. This is less than $2,900, so they meet Rule 6. They read the rest of Publication 596 and find that they meet all the rules to claim
the EIC. For example, they will file a joint return (Rule 3). Both of their children are qualifying children (Rule 8). Also,
their AGI of $16,878 ($15,000 + $4,000 + $200 - $2,200 - $122) is less than $39,783 (Rule 1).
They use EIC Worksheet B (shown on pages 37 and 38) to figure their EIC of $4,716. They also complete Schedule EIC (not shown)
and attach it to
their Form 1040.
Filled in Worksheet 1 for Steve and Linda Green
Worksheet 1. Investment Income If You Are Filing Form 1040
Use this worksheet to figure investment income for the earned income credit when you file Form 1040.
|Interest and Dividends
Enter any amount from Form 1040,
Enter any amount from Form 1040, line 8b, plus any amount on Form 8814, line 1b.
Enter any amount from Form 1040, line 9a.
Enter the amount from Form 1040, line 21, that is from Form 8814 if you are filing that form to report
your child's interest and dividend income on your return. (If your child received an Alaska Permanent Fund dividend, use Worksheet
2, on the next
page, to figure the amount to enter on this line.)
|Capital Gain Net Income
Enter the amount from Form 1040, line 13. If the amount on that line is a loss, enter -0-.
Enter any gain from Form 4797, Sales of Business Property, line 7. If the amount on that line is a loss, enter -0-.
(But, if you completed lines 8 and 9 of
Form 4797, enter the amount from line 9 instead.)
Subtract line 6 of this worksheet from line 5 of this worksheet. (If the result is less than zero, enter
|Royalties and Rental Income from Personal Property
Enter any royalty income from Schedule E, line 4, plus any income from the rental of personal property shown on Form
1040, line 21.
Enter any expenses from Schedule E, line 21, related to royalty income, plus any expenses from the rental of personal
property deducted on Form 1040, line 36.
Subtract the amount on line 9 of this worksheet from the amount on line 8. (If the result is less than
zero, enter -0-.)
Enter the total of any
net income from passive activities (included on Schedule E, lines 26, 29a (col. (g)), 34a (col. (d)), and 40).
(See instructions below for lines 11 and 12.)
Enter the total of any losses from passive activities (included on Schedule E, lines 26, 29b (col. (f)), 34b (col. (c)),
and 40). (See instructions below for lines 11 and 12.)
Combine the amounts on lines 11 and 12 of this worksheet. (If the result is less than zero, enter
Add the amounts on lines 1, 2, 3, 4, 7, 10, and 13. Enter the total. This is your Investment
Is the amount on line 14 more than $2,900?
□Yes.You cannot take the credit.
□No. Go to Step 3 of the Form 1040 instructions for lines 66a and 66b to find out if you can take the credit
(unless you are using this publication to find out if you can take the credit; in that case, go to Rule 7, next).
|Instructions for lines 11 and 12.In figuring the amount to enter on lines 11 and 12, do not take
into account any royalty income (or loss) included on line 26 of Schedule E
or any amount included in your earned income. To find out if the income on line 26 or line 40 of Schedule E is from a
see the Schedule E instructions. If any of the rental real estate income (or loss) included on Schedule E, line
26, is not from a passive activity, print “NPA” and the amount of that income (or loss) on the dotted line next to line
Example 4. Victor and Ida Brown
Victor and Ida Brown have two children, Kevin, age 15, and Ashley, age 14. The children lived with Victor and Ida for all
of 2007. Ida earned wages
of $10,000 and Victor, a member of the clergy, received a salary of $17,000. Victor also receives a housing allowance of $500
a month ($6,000 a year)
from the church. The Browns received $200 in interest on their savings account. They had no other income in 2007.
Victor does not have to pay income tax on his housing allowance but he does have to include it in net earnings from self-employment
self-employment tax on it. To figure his self-employment tax, he must complete Schedule SE (Form 1040). He completes Schedule
SE and figures
self-employment tax of $3,250. He puts this figure on Form 1040, line 58, and deducts $1,625, one-half of his self-employment
tax, on Form 1040, line
Victor and Ida read the Form 1040 instructions for lines 66a and 66b, and find that they meet all the rules to claim the EIC.
For example, their
AGI of $25,575 ($17,000 + $10,000 + $200 - $1,625) is less than $39,783 (Step 1, question 1). Their investment income ($200 interest income
from a savings account) is less than $2,900 (Step 2). Both of their children are qualifying children (Step 3, question 1).
Completing EIC Worksheet B.
Because Victor is a member of the clergy, the Browns use EIC Worksheet B in the Form 1040 instructions (shown on pages
40 and 41) to figure their
earned income credit.
Victor and Ida enter $23,000 on line 1a. This amount, from Section B, line 3, of Victor's Schedule SE, consists of
his $17,000 salary plus his
$6,000 housing allowance. After completing lines 1a-1d, they enter $21,375 on line 1e.
Parts 2 and 3.
They skip parts 2 and 3.
On line 4a, they enter $10,000. They figured this amount in Step 5
of the Form 1040 instructions for lines 66a and 66b. They started
with the amount on line 7 (Form 1040), $27,000 ($17,000 + $10,000), and subtracted the amount on that line that was also reported
on line 2 of
Schedule SE, Victor's $17,000 salary. On line 4b, they enter $31,375 ($21,375 + $10,000). This is their total earned income.
Since it is less than
$39,783, they go to Part 5
and enter $31,375 on line 6.
They complete Parts 5
and figure their earned income credit of $1,771. They enter this amount on line 66a of Form
1040 and put “Clergy
” on the dotted line next to line 66a.
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