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Computing the Earned Income Credit

Author: Sophia

what's covered

1. Computing the Earned Income Credit
2. EIC Worksheets

1. Computing the Earned Income Credit

Eligible taxpayers with one or more qualifying persons must file Schedule EIC in order to claim the Earned Income Credit (EIC). Taxpayers eligible for the EIC who do not have a qualifying person do not complete this form.

Schedule EIC calls for information about the qualifying person or persons. If a taxpayer has more than three qualifying persons, they enter information about only three of them.

EXAMPLE

This year, Bill Haget (56), single, is filing Form 1040 claiming the head of household filing status. He has five qualifying children under age 19, all of whom are also qualifying persons for EIC. His earned income and adjusted gross income are $33,810, and his tax before credits is $1,519.

Bill’s Schedule EIC, shown below, reports only three of his children.

2. EIC Worksheets

The Earned Income Credit is calculated using one of two worksheets. Before computing the amount of the credit, however, the EIC qualifications must be considered. It may be helpful to follow the six steps below to determine the amount of EIC for a taxpayer.

2a. Step 1. All Filers Determine Eligibility

Based on income and number of qualifying children.
Based on the taxpayer (and spouse, if filing a joint return) having a valid SSN that allows them to work.
Based on filing status.
Based on foreign earned income. Taxpayers filing Form 2555 are not eligible for EIC.
Based on residency status. Taxpayers qualify according to residency status. Nonresident aliens must be married to a U.S. citizen or resident alien, file a joint return, and choose to be treated as a resident alien.

2b. Step 2. Investment Income

Determine whether the taxpayer’s investment income exceeds the maximum of $10,300. Add the amounts from Form 1040, lines:

2a, Tax-exempt interest.
2b, Taxable interest.
3b, Ordinary dividends.
7, Capital gains. (If line 7 is a loss, enter zero.)

2c. Step 3. Filers With a Qualifying Child

Determine:

Whether the taxpayer’s child qualifies as a qualifying person for EIC.
If the taxpayer is married and not filing a joint return with their spouse, they meet the rule for using the married filing separately filing status.
That the taxpayer is not an EIC qualifying person for another taxpayer.

2d. Step 4. Filers Without a Qualifying Child

Determine:

If the taxpayer is married and not filing a joint return with their spouse, they meet the rule for using the married filing separately filing status.
Eligibility according to age. Taxpayers without a qualifying child must be at least age 25 but less than 65 at the end of the year.
Eligibility according to residency in the United States. Taxpayers whose main home was not in the U.S. for more than half of 2022 do not qualify for EIC. Members of the military may qualify under certain circumstances.
Eligibility according to the taxpayer’s dependency status. Taxpayers who can be claimed as a dependent or an EIC qualifying person on another taxpayer’s tax return cannot claim EIC.

2e. Step 5: Earned Income

Begin with the earned income reported on Form 1040, line 1.
Taxpayers have the option to choose whether or not to include nontaxable income from Medicaid waiver payments. If this income was included in earned income on Form 1040, line 1, and the taxpayer chooses to exclude the income from the EIC calculation, it will be subtracted.
Nontaxable combat pay can be taken into consideration, as in some cases it may increase EIC, and the taxpayer may elect to treat it as taxable.

2f. Step 6: How to Figure the Credit

The 2022 EIC Worksheet B – Line 4a (Form 1040 Instructions, Step 5, Earned Income) and 2022 Worksheet A, Earned Income Credit (EIC) – Line 27 (shown below) are used to compute the amount of Earned Income Credit.

2f.i. 2022 EIC Worksheet B – Line 4a (Form 1040 Instructions, Step 5, Earned Income)

Enter the taxpayer’s earned income from Form 1040 on line 1. Lines 2 through 8 will not be covered in this course, so they will be left blank, zero will be entered on line 9, and the amount from line 1 will be entered on line 10. Then, any nontaxable combat pay will be entered on line 11 if the taxpayer elects to include that in their earned income, and their total earned income is entered on line 12.

2f.ii. 2022 EIC Worksheet A, Earned Income Credit (EIC) – Line 27

In Part 1, enter the taxpayer’s earned income from Form 1040 on line 1, then look up that amount in the EIC Tables and enter it on line 2. As with the tax tables, be sure to use the correct column for the taxpayer’s filing status and number of children.

hint

Do not confuse the EIC tables with the Tax Tables. The EIC tables are used to compute EIC. A copy of the EIC tables may be found in Publication 596, Earned Income Credit (EIC) starting on page 27.

Next, the taxpayer’s adjusted gross (AGI) income is entered on line 3 and compared to their earned income on line 1. If they are the same, the amount from the EIC tables on line 2 is entered on line 6, and this is their Earned Income Credit.

If the taxpayer’s earned income and AGI are different, Part 2 is used to look up their EIC based on their AGI.

The smaller of the two potential EIC amounts is entered on line 6 of the worksheet and carried to their Form 1040.

IN CONTEXT: EIC Worksheet B

If the taxpayer is self-employed at any time in 2022, or if they are filing a Schedule SE because they are a member of the clergy or a statutory employee filing Schedule C, they will complete 2022 Worksheet B, Earned Income Credit (EIC) – Line 27a, instead of Worksheet A, Earned Income Credit (EIC) – Line 27a. This worksheet is beyond the scope of this course.