11/24/2017

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Earned Income Credit

The earned income credit (EIC) is a tax credit for certain people who work and have earned income under a prescribed amount per year and meet certain rules that are put in place by the Internal Revenue Service (IRS). A tax credit usually means more money in your pocket and it reduces the amount of tax you owe.

To qualify for earned income credits, you must work and earn an income. As an employee, earned income includes all taxable income you receive from your employer. This also includes statutory employees and money earned from self employment. You are considered a statutory employee when your employer gives you a Form W-2 and the statutory employee box is checked.

If you are married and you and/or your spouse has worked and has earned income, you will fall under the earned income rule if you file a joint return.

Net earning from self employment. The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earning from self-employment.

Earned income is generated from wages, tips, salaries, net earnings from self employment, and gross income as a statutory employee. Employee pay is earned income only if it is taxable. Nontaxable employee pay is not considered earned income.

Income that is not considered earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. Do not include any of these items in your earned income.

  • Earnings while an inmate. Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. This includes amounts for work performed while in a work release program or while in a halfway house.
  • Workfare payments. Nontaxable workfare payments are not earned income for the earned income credit. These are cash payments certain people receive from a state or local agency that administers public assistance programs funded under the federal Temporary Assistance for Needy Families (TANF) program in return for certain work activities such as (1) work experience activities (including remodeling or repairing public housing) if sufficient private sector employment is not available, or (2) community service program activities.
  • Community property. If you are married, but qualify to file as head of household under special rules for married taxpayers living apart, and live in a state that has community property laws, your earned income for the earned income credit does not include any amount earned by your spouse that is treated as belonging to your spouse under your state's community property laws.
  • Qualified Joint Venture. If you are a member of a qualified joint venture that is a passive activity with rental real estate income not subject to self-employment tax, income or loss from that activity is not earned income.
  • Nontaxable military pay. Nontaxable pay for members of the Armed Forces is not considered earned income for the earned income credit.You can elect not to include your nontaxable combat pay in earned income for the earned income credit.

This information is published by the Department of the Treasury, Internal Revenue Service (IRS), Earned Income Credit (EIC).

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