Tax Topics

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These topics explore some of the more important aspects of complicated tax laws, in a manner that is understandable and concise.


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Earned Income Credit

The Earned Income Credit (EIC) is a refundable federal tax credit for eligible individuals and families who have earned income. You have earned income if you work for someone who pays you or if you work in a business you own. Taxable earned income includes wages, salaries, tips, union strike benefits, long-term disability benefits received prior to minimum retirement age and net earnings from self-employment. If you can take the EIC, it reduces the tax owed. The credit can be refunded even if you do not owe any tax.

The amount of this credit varies depending on the number of qualifying children living with you. You could be entitled to a refundable credit of up to $6,143 if you have three or more qualifying children, $5,460 if you have two qualifying children, $3,305 if you have one qualifying child, or $496 if you have no qualifying children or no children at all.

  • Rules for the Earned Income Credit

  • Valid Social Security Number

  • Qualifying Child for the Earned Income Credit

  • Tie-Breaker Rule if More Than One Person Can Claim the Credit

  • Earned Income Credit - No Qualifying Children

  • How Does the Advance Earned Income Credit Work?

  • Earned Income Credit - Fraudulent or Reckless Claim

  • Claiming the Earned Income Credit after Disallowance


Contact your local Jackson Hewitt office for more information.

Rules for the Earned Income Credit

To qualify for the EIC, you must meet the following requirements:

  • You must have earned income. If you are married and file a joint return, you meet this rule if at least one spouse has earned income.
  • For 2014, your earned income and adjusted gross income must both be less than:
    • $14,590 ($20,020 if Married Filing Jointly) if you have no qualifying children
    • $38,511 ($43,941 if Married Filing Jointly) if you have one qualifying child
    • $43,756 ($49,186 if Married Filing Jointly) if you have two qualifying children
    • $46,997 ($52,427 if Married Filing Jointly) if you have three or more qualifying children
     
  • You (and your spouse if Married Filing Jointly) must have a Social Security number (SSN) that allows you to work. Your Social Security card cannot say "not valid for employment."
  • Your return must include a valid SSN for each person you claim as a qualifying child on Schedule EIC, Earned Income Credit.
  • Your filing status cannot be Married Filing Separately.
  • You must be a U.S. citizen or resident alien all year.
  • You must not have filed Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.
  • Generally, you must not have more than $3,350 of investment income (i.e., interest, dividends, net income from rent, net capital gain, and net passive income that is not self-employment income). If qualifying children are used for the credit, they must meet the Relationship, Age, and Residency Tests. A qualifying child cannot be used by more than one person to claim the EIC.
  • If no qualifying children are used for the credit, you must be at least age 25 but under age 65.
  • You cannot be the qualifying child of another person or be claimed as a dependent on another return.
  • You must have lived in the United States for more than half of the year. Members of the military on extended active duty outside the United States are considered to be in the United States during the duty period.

Even if you are not required to file a return because you did not earn enough during the year, you may still qualify for the EIC. However, to get the credit, you must file a return and meet all the rules.

For example, James and Terri are married and have two children, ages 4 and 7. All of them are U.S. citizens and lived in the same home in the U.S. all year. No one else lived with them and neither James nor Terri can be claimed as a dependent on another person's return. They plan to file a joint return. James is self-employed and had a net profit from his business of $38,000. Terri is unemployed and received unemployment benefits of $12,400. James received $17 in interest from a savings account. James and Terri have no other income or expenses. They will be able to claim the EIC on their joint return because they meet all the conditions listed above: one of them has earned income, they are not filing a separate return, their earned income and adjusted gross income are under $49,186  and their investment income is under $3,350.

Valid Social Security Number

To claim the EIC, you must have a valid Social Security number (SSN) that allows you to work. Additionally, your spouse (if Married Filing Jointly) and any qualifying child you list on Schedule EIC must also have valid SSNs. An SSN is a number issued by the Social Security Administration to a U.S. citizen or to a person who has permission to work in the United States. This permission to work in the United States was previously granted by the Immigration and Naturalization Service (INS), but is now granted by the U.S. Citizenship and Immigration Services (USCIS), a bureau of Homeland Security. If your spouse's, any qualifying child's, or your own SSN is missing from your tax return or is incorrect, the IRS may disallow your EIC.

If the Social Security card says "Not valid for employment" and the card was issued so that you could get a federally funded benefit (such as Medicaid), you cannot claim the EIC. If you have a card with the legend "Not valid for employment" and your immigration status has changed so that you are now a U.S. citizen or permanent resident, request a new card (one without the legend "Not valid for employment") from the Social Security Administration. If your Social Security card reads "Valid for work only with INS authorization,"then you do have a valid SSN.

You cannot get the credit if you, your spouse, or your qualifying child has:

  • An Individual Taxpayer Identification Number (ITIN) which is issued to a non-citizen who cannot get a SSN
  • An Adoption Taxpayer Identification Number (ATIN) which is issued for a child to adopting parents who have not yet received an SSN for the child being adopted

If you (or your spouse if Married Filing Jointly) do not have a SSN, you can apply for one by filing Form SS-5 with the Social Security Administration. If you do not have a valid SSN by the filing deadline for your tax return, you can either:

  • Request an automatic 6-month extension of time to file your return. You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
  • File the return on time without claiming the EIC. After receiving the valid SSN, file an amended return, Form 1040X, claiming the EIC. Attach a filled-in Schedule EIC, Earned Income Credit, if you are using a qualifying child to obtain the credit.

Qualifying Child for Earned Income Credit

Generally, your qualifying child is a child who meets all of the following tests:

  • Relationship Test - Your qualifying child must be your:
    • Child (son, daughter, stepchild, adopted child, or eligible foster child) or descendant (for example, grandchild or great grandchild)
    • Sibling, half sibling, stepsibling, or descendant (for example, nephew or niece)
     
  • Age Test - Your qualifying child must be under age 19, a full-time student under age 24, or any age if permanently and totally disabled.
  • Residency Test - Your qualifying child must have the same main home as you for more than half the year.
  • Your qualifying child cannot be used by more than one person to claim the EIC. If a child is the qualifying child for you and another person, you will need to decide who will claim that child. If both of you claim the same child, the IRS will use the tie-breaker rule to determine who can claim the child as a qualifying child and receive the allowed tax benefits including EIC.

Tie-Breaker Rule if More Than One Person Claims the Credit Based on the Same Qualifying Child

  • If only one of you is the child's parent, the parent will receive the credit for that child.
  • If both of you are the child's parents and you do not file a joint return together:
    • The parent with whom the child lived the longest period of time during the year will receive the credit for the child.
    • If the child lived with both parents the same amount of time, the parent with the highest adjusted gross income will receive the credit for the child.
     
  • If none of you are the child's parent, the person with the highest adjusted gross income will receive the credit for the child if that person has a higher AGI than either parent.

For example, Dianna is 27 years old and lives with her 3-year-old son, Alex, and her mother, Bridgette. Dianna earned $14,000 in wages. Bridgette also works and earned $25,000. Alex meets all of the tests to be a qualifying child for Dianna and Bridgette. Because only one of them can use Alex as a qualifying child and claim the EIC, they must look to the Tie-Breaker Rule to determine which one of them will use Alex as a qualifying child. Based on the Tie-Breaker Rule, Dianna will be the one allowed to use Alex as a qualifying child and to claim the EIC because she is Alex's parent.

What if Dianna had been living with Alex's father, Martin, to whom Dianna is not married, and Martin's adjusted gross income was higher than Dianna's? If Dianna and Martin both filed tax returns using Alex as a qualifying child, Martin would be the one allowed to use Alex as a qualifying child and claim the EIC, because Alex lived with both parents the same amount of time and Martin's adjusted gross income is higher.

Earned Income Credit - No Qualifying Children

You may still be eligible for the EIC if you do not have a qualifying child if you meet all of the applicable rules, and you (or your spouse if filing a joint return) were at least age 25 but under age 65 at the end of the year.

Earned Income Credit - Fraudulent or Reckless Claim

You will not be eligible for the EIC if the IRS has determined that you have previously claimed the credit fraudulently or recklessly. A fraudulent claim results in a 10-year loss of eligibility. A reckless claim results in a two-year loss of eligibility.

Claiming the Earned Income Credit after Disallowance

If you received a notice of deficiency denying your EIC for a previous year and you want to claim the EIC for current tax-year, you usually need to complete Form 8862, Information to Claim Earned Income Credit After Disallowance, and attach it to your return. You do not need to complete Form 8862 if both of the following apply to you:

  • You are claiming the EIC without a qualifying child for the current year.
  • Your EIC for the earlier year was reduced or disallowed solely because one or both of the children listed on your Schedule EIC were not your qualifying children for that year.

Contact your neighborhood Jackson Hewitt office for more information or assistance. Use the Office Locator feature available on this Web site or call 1-800-234-1040 begin_of_the_skype_highlighting1-800-234-1040 FREE end_of_the_skype_highlighting to find the Jackson Hewitt location most convenient to you.

Contact your neighborhood Jackson Hewitt office for more information or assistance. Use the Office Locator feature available on this Web site or call 1-800-234-1040 begin_of_the_skype_highlighting1-800-234-1040 FREE end_of_the_skype_highlighting to find the Jackson Hewitt location most convenient to you.