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2003 Military Tax Guide (For 2002 Tax Year)
Credits - Earned Income Credit
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The earned income credit (EIC) is a special credit for certain persons who work. The credit reduces the amount of tax you owe (if any) and is intended to offset some of the increases in living expenses and social security taxes.

<Caution> If you claim the EIC and it is later disallowed, you may have to complete an additional form if you want to claim the credit in a following year. See chapter 5 in Publication 596 for more information, including how to claim the EIC after disallowance.

Persons With a Qualifying Child

If you have a qualifying child, you must meet all the following rules to claim the earned income credit.

1) You must have earned income during 2002.

2) Your earned income and adjusted gross income (AGI) must each be less than:

a) $33,178 ($34,178 for married filing jointly) if you have two or more qualifying children,

b) $29,201 ($30,201 for married filing jointly) if you have one qualifying child, and

c) $11,060 ($12,060 for married filing jointly) if you do not have any qualifying children.

3) Your filing status cannot be married filing separate.

4) You (or your spouse, if filing a joint return) cannot be a qualifying child of another person.

5) Generally, your qualifying child cannot be the qualifying child of another person with a higher AGI. See Qualifying child of more than one person, later.

6) You cannot file Form 2555, Foreign Earned Income, or Form 2555–EZ, Foreign Earned Income Exclusion, to exclude income earned in foreign countries, or to deduct or exclude a foreign housing amount. See Publication 54 for more information.

7) You must be a U.S. citizen or resident all year unless:

a) You are married to a U.S. citizen or a resident alien, and

b) You choose to be treated as a resident alien for the entire year. See Publication 519 for more information.

8) Your investment income must be $2,550 or less during the year. For most people, investment income is taxable interest and dividends, taxexempt interest, and capital gain net income.

9) You must have a valid social security number for yourself, your spouse (if filing a joint return), and any qualifying child.

Qualifying child of more than one person. Sometimes, a child meets the rules to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child and claim the EIC using that child. The paragraphs that follow will help you decide who can claim the EIC when more than one person has the same qualifying child.

For tax year 2002, you can choose which person will claim the EIC. If you and someone else have the same qualifying child, you and the other person(s) can decide who will claim the credit using that qualifying child. However, if you and the other person(s) cannot agree and more than one person claims the credit using the same child, the tiebreaker rule (explained in the next paragraph) applies. If the other person is your spouse and you file a joint return, this rule does not apply.

Tiebreaker rule. Under the tiebreaker rule, the child will be treated as a qualifying child only by:

1) The parent, if only one of the persons is the child’s parent,

2) The parent with whom the child lived for the longest period of time during the year, if two of the persons are parents of the child and they do not file a joint return together.

3) The parent with the highest AGI if the child lived with each parent for the same amount of time during the tax year, and they do not file a joint return together.

4) The person with the highest AGI, if none of the persons is the child’s parent.

Adjusted gross income (AGI). AGI for most people is the amount on line 35, Form 1040, or line 21, Form 1040A. See Publication 596 if you file Schedule E or you are claiming a loss from the rental of personal property not used in a trade or business.

If another person claims the EIC using this child. If your qualifying child is treated under this rule as the qualifying child of another person for 2002, you cannot take the EIC using this qualifying child. You may be able to take the EIC using a different qualifying child, but you cannot take the EIC for people who do not have a qualifying child. If you do not have another qualifying child, you cannot take the EIC.

See Rule 8 in Publication 596 for more help in determining whether you can claim the EIC when you and someone else have the same qualifying child.

Qualifying child of another person. If you are a qualifying child of another person, you cannot claim the credit— no matter how many qualifying children you have.

How to report. If you meet all these rules, fill out Schedule EIC and attach it to either Form 1040 or Form 1040A. Also, complete the worksheet in the instructions for Form 1040 or Form 1040A to figure the amount of your credit. If you have a qualifying child, you cannot claim the credit on Form 1040EZ.

Enter “NO” directly to the right of line 64 (Form 1040) or line 41 (Form 1040A) if you cannot claim the credit because:

• Your total taxable earned income or adjusted gross income was $29,201 ($30,201 for married filing jointly) or more if you have one qualifying child, or $33,178 ($34,178 for married filing jointly) or more if you have more than one qualifying child),
• You were a qualifying child for another person in 2002,
• Generally, your qualifying child was also the qualifying child of another person whose AGI is higher than yours (as explained under Qualifying child of more than one person, earlier), or
• You, your spouse, or qualifying child does not have a valid social security number.

Social security number. You must provide a correct and valid social security number (SSN) issued by the Social Security Administration for yourself, your spouse, and any qualifying child. If a social security card for you, your spouse, or your qualifying child says “Not valid for employment,” you cannot get the credit.

If you need to get an SSN, file Form SS–5 with your local Social Security Administration office. It takes approximately two weeks to receive an SSN. If the filing deadline is approaching and you do not have an SSN, you can:

• Request an automatic extension to August 15 using Form 4868, or
• File the return on time without claiming the credit. After you receive the SSN, file an amended return (Form 1040X) claiming the credit (and attach a filledin Schedule EIC if needed).
<Caution> If an SSN for you, your spouse, or your qualifying child is missing from your tax return, or is incorrect, you may not get the credit.

Married persons. Married persons usually must file a joint return to claim the earned income credit. Even though you are married, you may file as head of household and claim the credit on your return if:

1) Your spouse did not live in your home at any time during the last 6 months of the year,

2) You paid more than half the cost to keep up your home for the entire year, and

3) You and your child lived in the same main home for more than half the year. You also must be entitled to claim an exemption for your child.

You will meet (3), even if you cannot claim your child, if:

• You gave that right to your child’s other parent by filling out Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or similar written statement, or
• There is a pre-1985 agreement (decree of divorce or separate maintenance or written agreement) granting the exemption to your child’s other parent.

Qualifying Child

You have a qualifying child if your child meets three tests:

1) Relationship,

2) Residency, and

3) Age.

Relationship test. To meet the relationship test, the child must be your:

• Son, daughter, stepson, stepdaughter, or adopted child (or a descendant of your son, daughter, stepson, stepdaughter, or adopted child—for example, your grandchild),
• Brother, sister, stepbrother, or stepsister (or the child or grandchild of your brother, sister, stepbrother, or stepsister), or
• Eligible foster child.

Adopted child. A child you legally adopt or who is placed with you by an authorized placement agency for adoption is treated the same as your child by blood.

Married child. Generally, a married child can be your qualifying child only if you can claim an exemption for the child. If you cannot claim an exemption for your married child, he or she still can be your qualifying child if the only reason you cannot claim the exemption is one of the following.

• You gave the right to claim the child’s exemption to your child’s other parent by filling out Form 8332, or a similar written statement, or
• You gave the right to claim the child’s exemption to your child’s other parent in a pre1985 agreement (such as a separation agreement or divorce decree).

If you need more information about either of these exceptions or when you can claim an exemption for your child, see Publication 501, or Publication 504, Divorced or Separated Individuals.

Residency test. To meet the residency test:

• A qualifying child must have lived in your home for more than half the year, and

• The home must be in the United States. (U.S. military personnel stationed outside the United States on extended active duty are considered to be living in the United States.)

Birth or death of a child. The child is considered to have lived with you for all of 2002 if:

• The child was born or died during the year, and
• The child lived with you for the part of the year he or she was alive.

Temporary absences. Count time that you or the qualifying child is away from home on a temporary absence due to a special circumstance as time lived at home. Examples of special circumstances include:

• Illness,
• Attending school,
• Detention in a juvenile facility,
• Business,
• Vacation, or
• Military service.

You may be eligible for the earned income credit if you are absent temporarily only because of military service. To be eligible for the credit, you must plan to return to your main home where your qualifying child lives, at the end of your assignment. Service in a combat zone is a temporary absence.

Age test. The age test is met if your child is:

• Under age 19 at the end of the year,
• A fulltime student under age 24 at the end of the year, or
• Permanently and totally disabled at any time during the tax year, regardless of age.

Persons Without a Qualifying Child

If you do not have a qualifying child, you can take the credit if you meet all the following rules.

1) You must have earned income during 2002.

2) Your earned income and adjusted gross income must each be less than $11,060 ($12,060 for married filing jointly).

3) Your filing status cannot be married filing separate return.

4) You (or your spouse, if filing a joint return) cannot be a qualifying child of another person. See Qualifying child of another person, earlier.

5) You (or your spouse if filing a joint return) must be at least age 25 but under age 65 at the end of your tax year.

6) You (or your spouse, if filing a joint return) cannot be claimed as a dependent by anyone else on that person’s return.

7) Your main home must be in the United States for more than half the year. (U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States.)

8) You cannot file Form 2555, Foreign Earned Income, or Form 2555–EZ, Foreign Earned Income Exclusion.

9) You must be a U.S. citizen or resident alien all year unless:

a) You are married to a U.S. citizen or a resident alien, and

b) You choose to be treated as a resident alien for the entire year.

10) Your investment income must be $2,550 or less during the year. For most people, investment income is taxable interest and dividends, taxexempt interest, and capital gain net income.

11) You (and your spouse, if filing a joint return) must have a valid SSN. In either case, you can use only a valid SSN issued by the Social Security Administration. If a social security card for you or your spouse says, “Not valid for employment,” you cannot get the credit.

How to report. If you meet all of these rules, fill out the worksheet in your tax forms instructions for EIC to figure the amount of your credit.

Enter “No” directly to the right of line 64 (Form 1040), next to line 41 (Form 1040A), or on line 8 (Form 1040EZ) if you cannot claim the credit because:

• Your total taxable earned income or adjusted gross income was $11,060 ($12,060 for married filing jointly) or more,
• You (or your spouse, if filing a joint return) were under age 25 or age 65 or more,
• Your home was not in the United States for more than half the year,
• You (or your spouse, if filing a joint return) were a qualifying child of another person in 2002, or
• You (or your spouse, if filing a joint return) did not have a valid SSN.

Earned Income

For purposes of the earned income credit, earned income includes:

• Wages, salaries, and tips,
• Net earnings from selfemployment, and
• Anything else of value, if included in gross income, that you received for providing services.
For purposes of the earned income credit, earned income does not include:
• Basic pay or other incentive pays earned in a combat zone,
• Basic Allowance for Housing (BAH),
• Basic Allowance for Subsistence (BAS),
• Interest and dividends,
• Social security and railroad retirement payments,
• Certain workfare payments,
• Pensions or annuities,
• Veterans’ benefits (including VA rehabilitation payments),
• Workers’ compensation,
• Unemployment compensation, or
• Alimony and child support.
Next page > Credits - IRS Will Figure Your Credits for You >

Above Information Extracted from IRS Publication #3, Armed Forces Tax Guide

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