25.11 Income Tests for Earned Income Credit (EIC)

For purposes of the credit, earned income includes wages, salary, tips, commissions, jury duty pay, union strike benefits, certain disability pensions, and net earnings from self-employment. An election may be made to include combat pay that is otherwise excluded from income (35.4) as earned income for EIC purposes. Apart from such combat pay, nontaxable employee compensation, such as salary deferrals, or excludable dependent care benefits, is not considered when computing the credit.

Filing Tip

Definition of Earned Income for EIC Purposes

Earned income includes tax free combat pay (35.4), but does not include other nontaxable employee compensation such as salary deferrals and reductions, excludable dependent care benefits, and excludable education assistance.

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Disqualifying income.

For 2012, an individual is not eligible for the earned income credit if he or she has “disqualified income” exceeding $3,200. Disqualified income includes interest (taxable and tax-exempt), dividends, net rent and royalty income, net capital gain income, and net passive income that is not self-employment income.

Credit phases out with income.

There are different phaseout ranges for married couples filing jointly than for taxpayers filing as single, head of household, or qualifying widow(er).

If your filing status is single, head of household, or qualifying widow(er), and you have qualifying children, your 2012 credit begins to phase out in the EIC Table if either earned income or adjusted gross income is at least $17,100, regardless of the number of children. The phaseout endpoint depends on the number of children. The credit is completely phased out if earned income or adjusted gross income is at least $36,920 for one child, $41,952 for two children, and $45,060 for three or more children.

If you are married filing jointly and have qualifying children, the 2012 credit begins to phase out in the EIC Table if either earned income or adjusted gross income is at least $22,300, regardless of the number of children. The phaseout endpoint depends on the number of children. The credit is completely phased out if earned income or adjusted gross income is at least $42,130 for one child, $47,162 for two children, and $50,270 for three or more children.

If you do not have any qualifying children, the phaseout of the credit begins when either earned income or AGI is at least $7,800, or $13,000 if married filing jointly, and the credit is completely phased out if either amount is $13,980 or more, or $19,190 or more if married filing jointly).

Self-employed.

If you were self-employed in 2012, your earned income for credit purposes is the net earnings shown on Schedule SE, less the income tax deduction for self-employment tax claimed on Line 27 of Form 1040. If your net earnings were less than $400, the net amount is your earned income for purposes of the credit. If you had a net loss, the loss is subtracted from any wages or other employee earned income. If you are a statutory employee, the income reported on Schedule C qualifies for the credit.

Foreign earned income.

If you work abroad and claim the foreign income exclusion, you may not take the credit.