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IRS.gov Website
Publication 596
taxmap/pubs/p596-015.htm#en_us_publink1000298597

Chapter 4
Figuring and Claiming the EIC(p18)


You must meet one more rule to claim the EIC.
You need to know the amount of your earned income to see if you meet the rule in this chapter. You also need to know that amount to figure your EIC.
taxmap/pubs/p596-015.htm#en_us_publink1000298598

Rule 15—Earned Income Limits(p18)

rule
Your earned income must be less than:
taxmap/pubs/p596-015.htm#en_us_publink1000298602

Earned Income(p18)

rule
Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, isn't earned income. But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Earned income is explained in detail in Rule 7 in chapter 1.
Deposit
You may be able to elect to use your 2016 earned income to figure your EIC if (a) your 2016 earned income is more than your 2017 earned income, and (b) your main home was located in one of the Presidentially declared disaster areas eligible for this relief on the specified date. For details, see Pub. 976.
taxmap/pubs/p596-015.htm#en_us_publink1000298603

Figuring earned income. (p18)

rule
If you are self-employed, a statutory employee, or a member of the clergy or a church employee who files Schedule SE (Form 1040), you will figure your earned income when you fill out Part 4 of EIC Worksheet B in the Form 1040 instructions.
Otherwise, figure your earned income by using the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b or the Form 1040A instructions for lines 42a and 42b, or the worksheet in Step 2 of the Form 1040EZ instructions for lines 8a and 8b.
When using one of those worksheets to figure your earned income, you will start with the amount on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). You will then reduce that amount by any amount included on that line and described in the following list.
taxmap/pubs/p596-015.htm#en_us_publink1000298604
Clergy. (p19)
If you are a member of the clergy who files Schedule SE and the amount on line 2 of that schedule includes an amount that was also reported on line 7 (Form 1040), subtract that amount from the amount on line 7 (Form 1040) and enter the result on line 1 of the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b. Put "Clergy" on the dotted line next to line 66a (Form 1040).
taxmap/pubs/p596-015.htm#en_us_publink1000298605
Church employees. (p19)
A church employee means an employee (other than a minister or member of a religious order) of a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes. If you received wages as a church employee and included any amount on both line 5a of Schedule SE and line 7 (Form 1040), subtract that amount from the amount on line 7 (Form 1040) and enter the result on line 1 of the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b.
taxmap/pubs/p596-015.htm#en_us_publink1000298606
Nontaxable combat pay. (p19)
You can elect to include your nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received.
EIC
If you are using your 2016 earned income to figure your 2017 EIC and you elected to include nontaxable combat pay, be sure to use 2016 nontaxable combat pay and enter that amount on line 66b of Form 1040, line 42b of Form 1040A, or line 8b of Form 1040EZ.
If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. In other words, if one of you makes the election, the other one can also make it but doesn't have to.
The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q.
Electing to include nontaxable combat pay in earned income may increase or decrease your EIC. Figure the credit with and without your nontaxable combat pay before making the election. Whether the election increases or decreases your EIC depends on your total earned income, filing status, and number of qualifying children. If your earned income without your combat pay is less than the amount shown below for your number of children, you may benefit from electing to include your nontaxable combat pay in earned income and you should figure the credit both ways. If your earned income without your combat pay is equal to or more than these amounts, you will not benefit from including your combat pay in your earned income.
The following examples illustrate the effect of including nontaxable combat pay in earned income for the EIC.
taxmap/pubs/p596-015.htm#en_us_publink1000298607

Example 1—Election increases the EIC. (p19)

George and Janice are married and will file a joint return. They have one qualifying child. George was in the military and earned $15,000 ($5,000 taxable wages + $10,000 nontaxable combat pay). Janice worked part of the year and earned $2,000. Their taxable earned income and AGI are $7,000. George and Janice qualify for the EIC and fill out the EIC Worksheet and Schedule EIC.
When they complete the EIC Worksheet without adding the nontaxable combat pay to their earned income, they find their credit to be $2,389. When they complete the EIC Worksheet with the nontaxable combat pay added to their earned income, they find their credit to be $3,400. Because making the election will increase their EIC, they elect to add the nontaxable combat pay to their earned income for the EIC. They enter $3,400 on line 42a of their Form 1040A and enter the amount of their nontaxable combat pay on line 42b.
taxmap/pubs/p596-015.htm#en_us_publink1000298608

Example 2—Election doesn't increase the EIC. (p19)

The facts are the same as Example 1 except George had nontaxable combat pay of $24,000. When George and Janice add their nontaxable combat pay to their earned income, they find their credit to be $2,266. Because the credit they can get if they don't add the nontaxable combat pay to their earned income is $2,389, they decide not to make the election. They enter $2,389 on line 42a of their Form 1040A.