Qualifying for an Earned Income Credit

Posted: Monday, January 20, 2003

WASHINGTON (AP) -- Lower-income workers may find it easier this year to qualify for a special tax credit designed to supplement wages and offset the payroll taxes they pay.

New rules went into effect in 2002 for the earned income credit, which since 1975 has refunded some or all of the money taken out of the paychecks of lower-income workers during the year. The program is designed to encourage people to work instead of remaining jobless.

Before 2002, the credit was based on a taxpayer's earned income -- both taxable (like wages) and nontaxable, such as salary deferrals for contributions to employer-sponsored retirement and health plans.

For 2002, only taxable earned income is used to figure the credit. As a result, some taxpayers will find it easier to qualify for the credit, which shrinks as income grows and is greater for larger families.

To claim the earned income credit, you must have worked and earned income in 2002. ''Earned income'' includes wages, salaries, tips, other taxable employee compensation and net earning from self-employment.

The amount taxpayers can earn while still receiving the credit has increased for 2002. Investment income (interest, dividends and capital gain net income) must be under $2,550. Total income must be less than $29,201 for single filers with one qualifying child ($30,201 for married filing jointly), $33,178 for single filers with more than one qualifying child ($34,178 for married filing jointly), or $11,060 for single filers with no qualifying child ($12,060 for married filing jointly).

To claim the credit you must file a tax return even if you don't owe any tax, didn't earn enough money to file a return or didn't have income taxes withheld from your pay. Figure your earned income credit on a worksheet in the tax form's instructions -- use either form 1040A or 1040EZ if you otherwise wouldn't have had to file a return. Or, let the IRS figure the credit for you.

A taxpayer must have a valid Social Security number to claim the credit. There are rules covering filing status, U.S. residency and income requirements. There also are rules for claiming the credit with a child.

When two or more people attempt to qualify for the credit based on the same child -- if, for example, the child lived with each of them periodically -- only one person may claim the child. For 2002, there are new ''tie-breaker'' rules to decide who may claim the child.

There's also a new definition of an eligible foster child -- the foster child only has to live with a taxpayer for more than half a year, instead of the whole year. A qualifying child can also include a descendant of a stepchild.

A taxpayer may claim both the earned income credit and the child tax credit of up to $600 per child.

Any refund from the earned income credit (and any advance earned income credit you received throughout the year) won't be used to determine whether you are eligible for Medicaid, food stamps and low-income housing.

See IRS Publication 17, ''Your Federal Income Tax,'' and Publication 596, ''Earned Income Credit,'' for more information.


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