Earned Income Tax Credit (EITC)
Questions and Answers

Advance Earned Income Tax Credit (EITC)
Questions and Answers

Earned Income Tax Credit (EITC) Questions and Answers

Q. What is the Earned Income Tax Credit (EITC)?

A. The Earned Income Tax Credit (EITC) is a refundable Federal tax credit for eligible individuals and families who work and have earned income under $31,152. The EITC reduces the amount of tax you owe, and it may give you a refund.

Earned Income Tax Credit (EITC) Questions and Answers

Q. Who can claim the credit?

A. To claim the EITC on your 2000 tax return, you must meet all of the following rules:

1. You must have earned income during the year.
2. Your earned income and modified AGI must each be less than:
   • $10,380 if you have no qualifying children, or;
   • $27,413 if you have one qualifying child, or;
   • $31,152 if you have more than one qualifying child.
3. Your investment income cannot be more than $2,400.
4. Your filing status can be any filing status EXCEPT married filing a separate return.
5. You cannot be a qualifying child of another person. If you are filing a joint return, neither you nor your spouse can be a qualifying child of another person.
6. Your qualifying child cannot be the qualifying child of another person whose modified AGI is more than yours.

Additionally, to claim the EITC, you must have a Social Security Number (SSN) for you, your spouse (if filing a joint return), and your qualifying child.

Earned Income Tax Credit (EITC) Questions and Answers

Q. What if I was denied the EITC last year?

Earned Income Tax Credit (EITC) Questions and Answers

Q. Who is a qualifying child?

A. Basically, a qualifying child is a child who:

1. Is your son, daughter, adopted child, grandchild, great-grandchild, stepchild, or eligible foster child, and;
2. Was (at the end of the tax year) under age 19 or under age 24 and a full-time student, or; permanently and totally disabled at any age during the year; and
3. Lived with you in the United States for more than half of the tax year (all of the tax year if the child is your eligible foster child).

Earned Income Tax Credit (EITC) Questions and Answers

Q. Who is an eligible foster child?

A. Beginning in tax year 2000, a child is your eligible foster child for the earned income tax credit if all the following apply.

1. The child is your brother, sister, stepbrother, stepsister (or a descendant of your brother, sister, stepbrother or stepsister) or is placed with you by an authorized placement agency.
2. You care for that child as you would your own child.
3. The child lived with you for the whole year, except for temporary absences.

Previously, the child had to meet only (2) and (3) above to be an eligible foster child.

Earned Income Tax Credit (EITC) Questions and Answers

Q. What is Earned Income?

A. Earned income includes all the income and wages you get from working — even if it is not taxable.

There are two ways to get earned income:

1. You work for someone who pays you, or;
2. You work in a business you own.

Taxable earned income includes:

• Wages, salaries, and tips;
• Union strike benefits;
• Long-term disability benefits received prior to minimum retirement age;
• Net earnings from self-employment.

Nontaxable earned income includes:

• Salary deferrals (example: 401 (k) plan);
• Military combat zone pay;
• Basic housing and subsistence allowances and in-kind housing and subsistence for the U.S. Military;
• Value of meals or lodging provided by an employer for the convenience of the employer;
• Housing allowance or rental value of a parsonage for the clergy;
• Excludable benefits provided by the employer such as dependent care, educational benefits, adoption benefits, and salary reductions, such as under a cafeteria plan.

Earned Income Tax Credit (EITC) Questions and Answers

Q. What is Modified AGI?

A. Modified AGI (adjusted gross income) for most people filing Form 1040, 1040A, or 1040EZ is the same as AGI. But, if you are filing Schedule C, C-EZ, D, E, or F, or you claim a loss from the rental of personal property not used in a trade or business, your modified AGI is the amount on Form 1040, line 33, plus the total of the following amounts:

1. Any loss claimed on Form 1040, line 13;
2. Any loss claimed on Schedule E, line 36;
3. Any royalty loss claimed on Schedule E, line 26;
4. Three-fourths of each of the following losses:
   • Any loss on Form 1040, line 12;
   • Any loss for Form 1040, line 18;
   • Any loss determined by combining any rental real estate income or (loss) included on Schedule E, line 26, and the amounts on lines 31 and 39 of that schedule.
5. Any loss from the rental of personal property not used in a trade or business (the amount by which the expenses for the rental deducted as an adjustment to line 32, Form 1040, are more than the income from the rental included on line 21, Form 1040).
6. Any tax-exempt interest shown on line 8b; and
7. The nontaxable part of a pension, annuity, or individual retirement arrangement (IRA) distribution, except any amount that is nontaxable because it was a trustee-to-trustee transfer or a rollover distribution.

If you and someone else have the same qualifying child, the person with the higher modified adjusted gross income (AGI) is the only one who may be able to claim the EITC using that child. The person with the lower modified AGI cannot use that child to claim the EITC.

Earned Income Tax Credit (EITC) Questions and Answers

Q. How do I figure my credit?

A. Once you know that you qualify for the EITC, you need to know how to figure the amount of the credit. You have two choices of how to figure the credit:

Earned Income Tax Credit (EITC) Questions and Answers

Q. Where can I get more information?

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. What is the advance Tax Credit (advance EITC)?

A. The advance EITC allows those taxpayers who expect to qualify for the Earned Income Tax Credit (EITC) and have at least one qualifying child to receive part of the credit in each paycheck during the year the taxpayer qualifies for the credit.

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. Why should I be interested in the advance EITC?

A. If you are working and

1. you expect your 2001 income will be below approximately $28,000,
2. you expect to have at least one qualifying child, and
3. you expect to qualify for EITC,

you can choose to get part of the credit with your paycheck. This year you may receive up to $1,457 with your paycheck if you are eligible for advance EITC.

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. How do I get advance EITC payments?

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. Could my advance EITC payments change?

A. Yes, if during the year, your income rises above the dollar limit, or you no longer qualify for the EITC, you need to fill out a new Form W-5 and give it to your employer to stop the advance payments.

If you no longer qualify for the advance EITC, you will have to repay all advance EITC money when you file your tax return.

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. If I get the advance EITC do I have to file a tax return?

A. Yes. If you receive the advance EITC, you must file a tax return. This will show the IRS the payments you received and will allow you to claim any extra credit you may be entitled to.

Advance Earned Income Tax Credit (EITC) Questions and Answers

Q. Where can I get more information on the EITC and advance EITC?