Earned income credit limits change

By SGT. 1ST CLASS JONATHAN HARRIS
NCOIC
Fort Knox Tax Center
The Earned Income Credit is a refundable federal tax credit available to working individuals or married couples. Its availability depends on adjusted gross income and family size. For tax year 2011, there are changes to the AGI limits and also to the definition of a qualifying child for purposes of determining family size and eligibility for the EIC.
In order to be eligible for EIC, taxpayers must have earned income. Earned income includes wages, salaries, tips, net earnings from self-employment or as a statutory employee. Examples of unearned income include pensions, stock earnings, interest, and social security benefits.
There are seven rules that apply to everyone filing a tax return to determine if they qualify for EIC. The first rule applies to your AGI. To qualify for EIC for tax year 2011, your AGI must be less than:
* $43,998 ($49,078 for married filing jointly) if you have three or more qualifying children,
* $40,964 ($46,044 for married filing jointly) if you have two qualifying children,
* $36,052 ($41,132 for married filing jointly) if you have one qualifying child, or
* $13,660 ($18,740 for married filing jointly) if you do not have a qualifying
child.
Second, all taxpayers and dependents on the return must have a valid social security number. Those with an individual taxpayer identification number are ineligible for the EIC.
Third, your filing status cannot be married filing separately. For taxpayers who did
not live together the
last six months of the year, they may qualify to file as Head of Household.
Fourth, taxpayers must be a U.S. citizen or resident alien all year.
The fifth rule requires that taxpayers not have any foreign earned income, as reported on Form 2555 or 2555-EZ.
The sixth requirement for EIC limits investment income to $3,100 or below.
Finally, if you (or your spouse if filing jointly) are or can be a qualifying child of someone else, you don’t qualify for the EIC.
If you meet all of the above criteria, the next set of rules applies to taxpayers with a qualifying child. To be a qualifying child:
* A child must be younger than you unless the child is permanently and totally disabled.
* A child cannot be your qualifying child if he or she files a joint return, unless the return was filed only for the purposes of claiming a refund.
* If the parents of a child can claim the child as a qualifying child but no parent claims the child, no one else can claim the child as a qualifying child unless that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child.
Once it is established that the child qualifies, the child must pass the relationship test (son, daughter, step-children, brother, sister, or descendant of any of them), age test (under 19 at the end of 2011 and younger than the taxpayers, or under 24 if a full-time student and younger than the taxpayer, or permanently and totally disabled regardless of age), residency test (must have lived with you for more than half the tax year) and joint return test (the child cannot file a joint return except to claim a refund). Qualifying children cannot be used by more than one taxpayer to claim the EIC. Specific rules determine which taxpayer is eligible to claim the child if more than one person feels they are eligible.
If you do not have a qualifying child, and pass the first seven rules, you must also pass four additional rules: you must be at least 25 but under 65 years old; you cannot be claimed as the dependent of another person; you cannot be the qualifying child of another person; and you must have lived in the United States for more than half the year.
For taxpayers who expect to be eligible for the EIC, they can also request from their employers advance payments instead of waiting until they file for the credit. Request a W-5 from the employer, complete it, and return it to the employer.
Nontaxable combat pay can have different effects on a Soldier’s earned income, possibly making him eligible for EIC even if he would not have been had he not deployed. Soldiers with higher amounts of earned income, who may not normally qualify for EIC, can elect to exclude their nontaxable combat pay for purposes of EIC eligibility. For example, Master Sgt. and Mrs. Jones have a combined earned income of roughly $75,000. Jones was deployed to Afghanistan from January to December 2011. His taxable base pay is $55,000 and Mrs. Jones makes $20,000 working as an administrative assistant. The Jones’ have two minor children. Normally, their combined $75,000 earned income would make them ineligible to receive EIC. However, because all Master Sgt. Jones’s earned income in 2011 was nontaxable combat pay, it can be excluded for EIC purposes. Therefore, because the Jones’ earned income is only the $20,000 Mrs. Jones made, they qualify for EIC.
Some Soldiers can include nontaxable combat pay to qualify for EIC where they normally would not have. For instance, Spc. Stone earns $25,500 in base pay per year. His wife, Mrs. Stone, stays home to take care of their two minor children and does not have additional income. Stone was also deployed to Afghanistan from January to December 2011. When he received his W-2 stating his income for the year, it stated that he had $0 taxable income because all of his earnings were nontaxable combat pay. Technically, because the Stones did not have any taxable earned income in 2011, they would not qualify for the EIC. However, the IRS allows combat pay to be figured in as earned income for the purposes of calculating EIC. Due to this exception, the Stones had $25,500 in earned income
making them eligible for EIC.
The amount of the EIC varies with each taxpayer. The tax preparers at the Fort Knox Tax Center will be able to help you determine your eligibility for the credit, as well as the amount you are entitled to. You can schedule your tax center appointment or find more Tax Center information by calling the Tax Center at (502) 624-0044, or by accessing the Tax Center’s homepage at http://www.knox.army.mil/sja/tax.asp. The Tax Center walk-in hours for 1040A or 1040EZ filers are Monday from 9 a.m.-7 p.m., Tuesday and Wednesday 9 a.m.-4 p.m., Thursday noon-4 p.m., and Friday 9 a.m.-4 p.m. If you have other Legal Assistance questions, please contact the Fort Knox Legal Assistance Office at (502) 624-2771. The Tax Center is located in the basement of Pike Hall, Bldg. 1310.