The earned income credit, or EIC, is a refundable credit for workers who meet certain requirements and file a tax return. Persons with or without a qualifying child may claim the EIC. For the year 2001, the maximum credit is $2,428 for persons with one qualifying child, and $4,008 for persons with two or more qualifying children. The maximum credit is $364 for persons without a qualifying child. The following requirements apply to all taxpayers who may be eligible for the EIC.

To claim the earned income credit, you must have earned income. For 2001 earned income includes all income from working even if it is not taxable. Starting in 2002, earned income will be limited to taxable amounts. Examples of earned income are wages, salaries, tips, and net earnings from self-employment. For 2001 earned income also includes certain nontaxable amounts such as contributions to a 401(k) plan, basic housing and subsistence allowances for military personnel, mandatory contributions to a state or local retirement plan, excludable employer-provided benefits, and salary reductions such as under a cafeteria plan. Starting in 2002, these nontaxable amounts will not be counted in earned income. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.

If you have investment income of more than $2,450, you may not claim the EIC. Investment income includes taxable interest, tax exempt interest, dividend income, capital gain net income, certain income from rents or royalties, and certain income from passive activities. It does not include gains from selling business assets. For more information, refer to Publication 596 (PDF), Earned Income Credit.

To claim the EIC, your filing status must be single, head of household, qualifying widow or widower, or married filing jointly. You cannot claim the EIC if your filing status is married filing separately.

You (and your spouse, if filing jointly) must each have a valid social security number issued by the Social Security Administration. You cannot claim the EIC if you (or your spouse, if filing jointly) have a social security card that says "not valid for employment" and the number was issued so that the cardholder could receive a federally funded benefit, such as Medicaid. If you fail to provide a social security number for yourself (and your spouse, if filing jointly), the EIC will not be allowed.

If you (or your spouse, if filing jointly) are a qualifying child of another person, you cannot claim the EIC.

If you file Form 2555 (PDF), Foreign Earned Income, or Form 2555EZ (PDF), Foreign Earned Income Exclusion, you cannot claim the EIC.

If you are a nonresident alien, you can claim the EIC only if you are married to a United States citizen or resident, and you file a joint return and are taxed as a resident for all of 2001.

There are three more requirements: age, dependency, and residency. To claim the EIC, you (Or your spouse, if filing jointly) must be at least age 25 but under age 65 at the end of 2001. If someone else can claim you (Or your spouse, if filing jointly) as a dependent on their return, you cannot claim the EIC. If someone else can claim you (Or your spouse, if filing jointly) as a dependent, but does not, you still cannot claim the EIC. To claim the EIC, you (And your spouse, if filing jointly) must live in the United States for more than half the year. Military personnel stationed outside the United States on extended active duty are considered to live in the United States during that period for EIC purposes.

A qualifying child is a child who meets certain relationship, residency, and age requirements. The child must be your son, daughter, adopted child, grandchild, stepchild, or eligible foster child. (For 2002 the definition of "qualifying child" will be changed somewhat.) An eligible foster child is a child who is your brother, sister, stepbrother, or stepsister (or a descendant of your brother, sister, stepbrother, or stepsister) or was placed with you by an authorized placement agency; who lived with you for the entire tax year; and whom you cared for as you would your own child. Your child must have lived with you in the United States for more than half the year, or for the entire year if an eligible foster child. Military personnel stationed outside the United States on extended active duty are considered to live in the United States during that period for EIC purposes. Your child must be under age 19 at the end of 2001 (or under age 24 at the end of 2001 and have been a full-time student during 2001), or any age if permanently and totally disabled. Refer to Publication 596 for exceptions to the time your child must have lived with you.

Your qualifying child must have a valid social security number issued by the Social Security Administration. If your qualifying child does not have a social security number or if your child's social security card reads "not valid for employment" and the number was issued so that the child could receive a federally funded benefit, such as Medicare, you cannot claim the EIC on the basis of that qualifying child. More information on social security numbers for purposes of the EIC can be found in Publication 596.

You cannot claim the EIC on the basis of a qualifying child if you and someone else have the same qualifying child and the other person has a higher modified adjusted gross income than you have. This is true even if the other person does not meet all the rules to claim the EIC or chooses not to claim the EIC.

For 2001, to claim the EIC, your earned income and modified AGI must each be less than $10,710 if you have no qualifying children, $28,281 if you have one qualifying child, or $32,121 if you have two or more qualifying children. Modified AGI for most people is the same as AGI. AGI is the amount on line 33 (Form 1040 (PDF)), line 19 (Form 1040A (PDF)), or line 4 (Form 1040EZ (PDF)). For 2001, you must add certain amounts to your AGI if you:

• Claim a loss on Schedule C, C-EZ, D, E, or F,
• Claim a loss from the rental of personal property not used in a trade or business,
• Received any tax-exempt interest, or
• Received any pension, annuity, or individual retirement arrangement (IRA) distribution that was partly nontaxable.

Starting in 2002, these amounts will not be added to your AGI. For more information, refer to Publication 596, Earned Income Credit.

Most people can use a worksheet in the instructions for Form 1040, 1040A, or 1040-EZ to figure this credit. People with more complex returns are required to figure their credit using a worksheet in Publication 596, or the IRS can figure the credit for you. If you want the IRS to figure the credit, carefully follow the steps in the instructions for your form or refer to Publication 596. This publication is also a valuable source for information on earned income credit in general.

If you expect to qualify for the EIC in 2002, you may be able to receive part of it in advance during the year. To see if you qualify to receive advance EIC, select Tax Topic 604.

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