QUALIFYING FOR EARN INCOME TAX CREDIT
Some taxpayers with lower-paying jobs may be eligible for an earned income tax credit (EITC), based on their income levels. The EITC is a refundable credit; if the credit amount exceeds the taxpayer’s tax liability, the taxpayer may receive a refund for the excess. The number of returns claiming the EITC has grown in recent years: The IRS reports that 27 million taxpayers received $63 billion in EITC in 2012.
First, let’s discuss what Earned Income is:
As indicated by its name, this credit is available only to taxpayers who have earned income. If a taxpayer is married and files a joint return, this requirement is met if at least one of the spouses works and has earned income.
Earned income includes:
- Wages, salaries, tips, and other taxable employee pay (when includible in the taxpayer’s gross income for the tax year);
- Net earnings from self-employment (if the taxpayer owns a business or is a minister or member of a religious order); and
- Gross income received as a statutory employee.
It does not include (among other things) interest and dividends; pensions and annuities; alimony and child support; and welfare benefits and unemployment compensation.
Taxable disability benefits received under an employer’s disability retirement plan are earned income until the taxpayer reaches minimum retirement age (generally, the earliest age at which a taxpayer could have received a pension or annuity if he or she were not disabled). Once a taxpayer reaches minimum retirement age, these payments are taxable as a pension and are not earned income. (Note: Payments from a disability insurance policy for which the taxpayer paid the premiums are not earned income, regardless of the taxpayer’s age.)
Foreign earned income. A taxpayer cannot claim the EITC if he or she has foreign earned income.
Investment income. A taxpayer may have only a limited amount of investment income; for 2013, this amount must be $3,300 or less. For 2014, the amount is $3,350 or less. Investment income generally includes interest (including tax-exempt interest), dividends, capital gain net income, net rental income, net royalty income, and net passive activity income. Gain treated as long-term capital gain under Sec. 1231(a)(1) will not be considered investment income.
AGI limits. Only taxpayers with income below certain levels are eligible for the EITC. These amounts differ, depending on whether the taxpayer is married and on how many children (if any) the taxpayer has. As a taxpayer’s AGI increases, the credit is phased out, with taxpayers above certain income levels not eligible for any credit at all.
However, there are many requirements that must be met to qualify:
Citizenship. To qualify for the EITC, the taxpayer (and spouse, if married) must be a U.S. citizen (or a resident alien) for the entire year.
Nonresident alien. If the taxpayer (or spouse) is a nonresident alien for any part of the year, he or she cannot claim the EITC unless the taxpayer files jointly with his or her spouse. This filing status may be used only if one spouse is a U.S. citizen (or resident alien) and the nonresident spouse elects to be treated as a U.S. resident. If they make this election, the couple will be subject to U.S. tax on their worldwide income, not just the amounts earned in the United States.
Social Security numbers. The taxpayer (and spouse, if married and filing jointly) must have a valid Social Security number. This is also a requirement for any qualifying child.
Note: A taxpayer or spouse who has an individual taxpayer identification number (ITIN) (rather than a Social Security number) is not eligible to claim the EITC.
Filing status. If the taxpayer is married, he or she must generally file as “married filing jointly”; a taxpayer filing as “married filing separately” cannot claim the EITC.
More Tips on Claiming the Earned Income Tax Credit (EITC) Click the link below
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