| Tax credits / Earned income credit rules and eligibility requirements |  |
|||
|
If you're eligible, the credit not
only reduces the tax that you may owe but also may result in IRS sending
you a refund for more than the amount of tax that was withheld from you.
In general, you qualify for the
credit for 2001 if your income for 2001 isn't more than certain amounts
and you have (1) one or more of your children (or their descendants) or
your stepchildren living with you for more than half of 2001, or (2) one
or more eligible foster children living with you for all of 2001. A
child born during the second half of 2001 meets the rule for living with
you for more than half the year if the child lives with you for that
part of the year that he or she is alive. A foster child is considered
to live with you for the whole year if, (a) the child is born or dies in
2001 and (b) your home is the child's home for the entire time he or she
is alive during 2001. A smaller earned income credit may
be available to you even if you don't have a qualifying child, if you or
your spouse (if filing a joint return) don't qualify as a dependent on
another taxpayer's tax return, are over 24 but under 65 years old, and
your home is in the U.S. for more than half of 2001. If two or more qualifying children
live with you for more than half of 2001, and your earned income and
modified adjusted gross income for 2001 each aren't more than $13,090,
your credit can be as much as $4,008. The credit is phased out for
higher earned income and modified adjusted gross income amounts and is
completely phased out if your earned income or modified adjusted gross
income is over $32,121. Modified adjusted gross income is adjusted gross
income determined without regard to deductible capital losses and
certain losses from a business, farm, estate or trust, rental property,
or royalty. And tax-exempt interest and nontaxable pension and annuity
distributions must be added back in. If one qualifying child lives with
you for more than half of 2001, and your earned income and modified
adjusted gross income for 2001 aren't more than $13,090, your credit can
be as much as $2,428. The credit is completely phased out if your earned
income or modified adjusted gross income is over $28,281. If no qualifying children live with
you, but you nonetheless qualify for the credit, the credit can be as much as $364 if your earned income and
modified adjusted gross income each aren't more than $5,950. The credit
is completely phased out if your earned income or modified adjusted
gross income is over $10,710. A qualifying child must be (1) under
19 years old as of the end of 2001, (2) under 24 years old as of the end
of 2001, and a student, or (3) permanently and totally disabled at any
time during 2001. A married child cannot be a qualifying child, unless
you can claim him or her as your dependent or you release the dependency
exemption claim to the noncustodial parent. If your child meets the conditions
to be your qualifying child and the qualifying child of another person
or persons, you may treat him or her as your qualifying child if you
have the highest adjusted gross income for 2001. You cannot take the credit for 2001
if: •
your disqualified income (dividends, interest, including
tax-exempt interest, capital gain net income, and passive activity
income) for the year is more than $2,450; •
your filing status is married filing separately; •
you exclude income earned in foreign countries or deduct or
exclude a foreign housing amount; •
you are filing a short-period return (i.e., a return for less
than 12 months). •
you are the qualifying child of another person; or •
you don't include your taxpayer identification (social security)
number on the return or, if married, your spouse's taxpayer
identification number isn't shown on the return.
Remember, the earned income credit is a refundable credit. You
can get a refund in the amount by which your credit exceeds the tax that
you owe for 2001, since IRS treats that amount as an overpayment of tax
by you. What's more, if you believe you will qualify for the credit for
2001, if you are an employee, and if you have a qualifying child, you
can get advance payments of the credit in your paycheck for each pay
period. All you have to do is provide your employer with a filled-in
Form W-5, Earned Income Credit Advance Payment Certificate. |
Home
Tax topics
|
|||