Earned Income Limit - How to Claim It on Form 1040

The Earned Income Credit - How to Claim It on Form 1040

The first article in this series discussed the issue of who qualifies for the Earned Income Credit (EIC), and the second article outlined how the credit is actually calculated. This article will discuss how a taxpayer may claim the credit when he files his annual income tax return with the IRS.

The first point to note in claiming the EIC is that the credit can only be claimed using either Form 1040 or Form 1040A. Individual taxpayers who may normally file Form 1040-EZ and may qualify for the EIC must use Form 1040A in order to claim the credit.

Claiming the credit is actually a three-step process:

Determine whether or not the taxpayer is qualified to take the credit
Calculate the amount of the credit
Complete Schedule EIC

Each of these steps will be discussed in detail below.

Does the Taxpayer Meet the Qualifications to Claim the EIC?

The overall qualifications for claiming the EIC are discussed in the first article of this series. In addition, to assist taxpayers to determine if they qualify, the IRS includes a decision tree in the Instructions for Form 1040. (The Instructions for Form 1040A also contains the same decision tree, but the line numbers in each step correspond to the line numbers on Form 1040A. This discussion will focus only Form 1040.) Completing the decision tree is a six-step process.

Step 1 is used by all income tax return filers to determine if they meet the basic qualifications. This includes whether or not the taxpayer’s Adjusted Gross Income is less than the maximum allowed. If the taxpayer does not meet the basic qualifications in this step, then he cannot claim the credit.

Step 2 is related to investment income. In 2014 total investment income was limited to $3,350, and in 2015 it will be limited to $3,400. However, in some cases investment income may exceed that limit, and certain forms of investment income will disqualify a taxpayer from claiming the credit.

Step 3 is used by the taxpayer to determine if any child qualifies as a qualifying child. Step 4 is used by any taxpayer without a qualifying child to determine if he can claim the credit.

Since a taxpayer’s earned income cannot exceed certain limits, and the earned income is used to calculate the credit, Step 5 is used to calculate the taxpayer’s earned income. Individuals who are members of the clergy or church employees are directed to special instructions. Taxpayers who have self-employment income are directed to complete Worksheet B.

Step 6 involves actually figuring the amount of the credit.

Calculating the Amount of the Earned Income Credit

Members of the clergy, church employees, taxpayers with self-employment income, and statutory employees must use Worksheet B to calculate the EIC, but most taxpayers will use Worksheet A to calculate the credit.

In Part 1 of Worksheet A the first step is to determine the amount of the EIC based on the taxpayer’s earned income as determined in Step 5 above. The amount of the credit can be determined using the EIC Tables provided in the instructions. Those who wish to estimate any possible EIC in 2015 can use the method outlined in the previous article of this series.

The second step is to enter the Adjusted Gross Income (AGI) from the taxpayer’s Form 1040. If the AGI is the same as the taxpayer’s earned income, then the taxpayer will skip Part 2 and enter the amount of the EIC in Part 3.

This step is necessary because both the earned income and the AGI must be within the income limits. In many cases the AGI will be greater than the taxpayer’s earned income because of investment income, interest, social security benefits, etc. So in Part 2 the taxpayer has to calculate the EIC based on the AGI if the AGI is different from the taxpayer’s earned income.

If the AGI is less than the income limits, then the EIC determined in Part 1 is entered in Part 3. If the AGI is more than the income limits, the EIC must be determined based on the AGI, and the lower EIC entered in Part 3. The amount of EIC from Part 3 is entered on Form 1040 as a refundable tax credit on the appropriate line.

Completing Schedule EIC

Schedule EIC is used to report information on each qualifying child. This information is used by the IRS to determine if each child meets the qualifying tests. Each child’s name and social security number are entered on Lines 1 and 2. The child’s year of birth is entered on Line 3 to determine if the child meets the age test.

If the child is older than 19 by the end of the tax year, then Line 4a is used to indicate whether or not the child still qualifies as a student under the age of 24, and Line 4b is used if the child is permanently and totally disabled.

Line 5 is used to indicate the relationship of the child to the taxpayer in order to determine if the relationship test is met. And the residency test is met if the taxpayer indicates on Line 6 that the child lived with the taxpayer for at least 7 months of the tax year.

Claiming the Earned Income Credit Can Help Low- and Moderate-Income Families

If any individual taxpayer or married couple meets the qualifications to claim the Earned Income Credit, then it is necessary to claim the credit on the annual Form 1040. Many fail to claim the credit each year. By following the guidelines in these articles, qualified taxpayers can avoid losing a credit to which they are entitled.