5. Credits
This chapter briefly discusses the credit for the elderly or disabled, the child and
dependent care credit, and the earned income credit. You may be able to reduce your
federal income tax by claiming one or more of these credits.
Credit for the Elderly
or the Disabled
This section explains who qualifies for the credit for the elderly or
the disabled and how to figure this credit. For more information, see Publication
524, Credit for the Elderly or the Disabled.
 You can take
the credit only if you file Form 1040 or Form 1040A. You cannot take the credit if you
file Form 1040EZ.
Credit figured for you. If you choose to have the IRS figure the
credit for you, see Publication 524. If you want the IRS to figure your tax, see
Publication 967, The IRS Will Figure Your Tax.
Can You Take the Credit?
You can take the credit for the elderly or the disabled if:
- You are a qualified individual, and
- Your income is not more than certain limits.
See Figures 5-A and 5-B, later.
Qualified Individual
You are a qualified individual for this credit if you are a U.S. citizen or resident,
and either of the following applies.
- You were age 65 or older at the end of 2002.
- You were under age 65 at the end of 2002 and all three of the following statements are
true.
- You retired on permanent and total disability (explained later).
- You received taxable disability income for 2002.
- On January 1, 2002, you had not reached mandatory retirement age (defined later under Disability
income).
 Age 65. You are considered to be age 65 on the day before your
65th birthday. Therefore, you are age 65 at the end of the year if your 65th
birthday is on or before January 1 of the following year.
Figures 5-A and 5-B. Are you a qualified individual?
U.S. citizen or resident. You must be a U.S.
citizen or resident (or be treated as a resident) to take the credit. Generally, you
cannot take the credit if you were a nonresident alien at any time during the tax year.
Exceptions. You may be able to take the credit if you are a
nonresident alien who is married to a U.S. citizen or resident at the end of the tax year
and you and your spouse choose to treat you as a U.S. resident. If you make that choice,
both you and your spouse are taxed on your worldwide income.
If you were a nonresident alien at the beginning of the year and a resident at the end
of the year, and you were married to a U.S. citizen or resident at the end of the year,
you may be able to choose to be treated as a U.S. resident for the entire year. In that
case, you may be allowed to take the credit. For information on these choices, see chapter
1 of Publication 519, U.S. Tax Guide for Aliens.
Married persons. Generally, if you are married at the end of the tax
year, you and your spouse must file a joint return to take the credit. However, if you and
your spouse did not live in the same household at any time during the tax year, you can
file either a joint return or separate returns and still take the credit.
Head of household. You can file as head of household and qualify to
take the credit even if your spouse lived with you during the first 6 months of the year
if you meet all of the tests. See Publication 524 and Publication 501.
Under age 65. If you are under age 65, you can qualify for the
credit only if you are retired on permanent and total disability. You are retired on
permanent and total disability if:
- You were permanently and totally disabled when you retired, and
- You retired on disability before the end of the tax year.
Even if you do not retire formally, you are considered retired on disability when you
have stopped working because of your disability. If you retired on disability before 1977,
see Publication 524.
Permanent and total disability. You are permanently and totally disabled if you cannot engage in any
substantial gainful activity because of your physical or mental condition. A
physician must certify that the condition has lasted or can be expected to last
continuously for 12 months or more, or that the condition can be expected to result in
death. See Physician's statement, later.
Substantial gainful activity. Substantial gainful activity is the performance of significant duties over a
reasonable period of time while working for pay or profit, or in work generally
done for pay or profit.
Full-time work (or part-time work done at the employer's convenience) in a competitive
work situation for at least the minimum wage conclusively shows that you are able to
engage in substantial gainful activity.
Substantial gainful activity is not work you do to take care of yourself or your home.
It is not unpaid work on hobbies, institutional therapy or training, school attendance,
clubs, social programs, and similar activities. However, doing this kind of work may show
that you are able to engage in substantial gainful activity.
The fact that you have not worked for some time is not, of itself, conclusive evidence
that you cannot engage in substantial gainful activity.
Physician's statement. If you
are under 65, you must have your physician complete a statement certifying that you were
permanently and totally disabled on the date you retired.
You do not have to file this statement with your Form 1040 or Form 1040A, but you must
keep it for your records. The instructions for either Schedule R (Form 1040) or Schedule 3
(Form 1040A) include a statement your physician can complete and that you can keep for
your records.
If you got a physician's statement in an earlier year and, due to your
continued disabled condition, you were unable to engage in any substantial gainful
activity during 2002, you may not need to get another physician's statement for 2002. For
a detailed explanation of the conditions you must meet, see the instructions for Part II
of Schedule R (Form 1040) or of Schedule 3 (Form 1040A). If you meet the required
conditions, you must check the box on line 2 of Part II of Schedule R (Form 1040) or of
Schedule 3 (Form 1040A).
If you checked box 4, 5, or 6 in Part I of either Schedule R or Schedule 3, print in
the space above the box on line 2 of Part II, the first name(s) of the spouse(s) for whom
the box is checked.
Disability income. If you are
under age 65, you can qualify for the credit only if you have taxable disability income.
Disability income must meet the following two requirements.
- The income must be paid under your employer's accident or health plan or pension plan,
and
- The income must be wages (or payments in lieu of wages) for the time you are absent from
work because of permanent and total disability.
Payments that are not disability income. Any payment you
receive from a plan that does not provide for disability retirement is not disability
income. Any lump-sum payment for accrued annual leave that you receive when you retire on
disability is a salary payment and is not disability income.
For purposes of the credit for the elderly or the disabled, disability income does not
include amounts you receive after you reach mandatory retirement age. Mandatory
retirement age is the age set by your employer at which you would have had to
retire had you not become disabled.
Figuring the Credit
If you figure the credit yourself, fill out the front of either Schedule R (if you are
filing Form 1040) or Schedule 3 (if you are filing Form 1040A). Next, fill out Part III of
either Schedule R or Schedule 3.
Child and Dependent
Care Credit
You may be able to claim this credit if you pay someone to care for
your dependent who is under age 13 or for your spouse or dependent who is not able
to care for himself or herself. The credit can be up to 30% of your expenses. To qualify,
you must pay these expenses so you can work or look for work.
If you claim
this credit, you must include on your return the name and taxpayer identification number
(generally the social security number) of each qualifying person. If the correct
information is not shown, the credit may be reduced or disallowed.
You also must show on your return the name, address, and the taxpayer identification
number of the person(s) or organization(s) that provided the care.
For more information, see Publication 503, Child and Dependent Care Expenses.
Earned Income Credit
The earned income credit (EIC) is available to persons with or
without a qualifying child. This section will list separately the rules that
persons with a qualifying child and persons without a qualifying child must meet to get
the credit. After you have read the rules, if you think you may qualify for the credit,
get Publication 596, Earned Income Credit. You also can find information in the
instructions for Form 1040 (line 64), Form 1040A (line 41), or Form 1040EZ (line 8).
Investment income more than $2,550. You cannot claim the earned
income credit unless your investment income is $2,550 or less. For most people, investment
income is taxable interest (line 8a of Form 1040 or 1040A, or line 2 of Form 1040EZ),
tax-exempt interest (line 8b of Form 1040 or 1040A, or written to the right of the words
Form 1040EZ on line 2 of Form 1040EZ), dividend income (line 9 of Form 1040 or 1040A), and
capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form
1040A). See Publication 596 for more information.
Credit has no effect on certain welfare benefits. The earned income
credit and the advance earned income credit payments you receive generally will not be
used to determine whether you are eligible for the following benefit programs, or how much
you can receive from the programs.
- Medicaid and supplemental security income (SSI).
- Food stamps.
- Low-income housing.
Temporary assistance for needy families (TANF) benefits may be affected. Please check
with your state.
Social security number. You must provide a correct and valid social
security number (SSN) for yourself, your spouse, and any qualifying children. If an SSN is
missing or incorrect, you may not get the credit. Publication 596 contains more detailed
information.
The social
security number must be issued by the Social Security Administration to a U.S. citizen or
to a person who has permission from the Immigration and Naturalization Service to work in
the United States. If your social security card says Not valid for employment, you
cannot get the earned income credit.
Self-employed persons. If you are self-employed and your net
earnings are $400 or more, be sure to fill out correctly Schedule SE (Form 1040), Self-Employment
Tax, and pay the proper amount of self-employment tax. If you do not, you may not get
all the credit to which you are entitled.
Who Can Claim the Credit?
The earned income credit is available to persons with or without a qualifying child.
Some of the rules are the same, but some of the rules only apply to persons with a
qualifying child or to persons without a qualifying child.
Persons Who Work and Have
One or More Qualifying Children
Generally, if you are a nonresident alien for any part of the year, you cannot claim
the credit. To claim the earned income credit under this section, you must meet all the
following rules.
- You must have a qualifying child who lived with you in the United States for more than
half the year.
- You must have earned income during the year.
- Your earned income and adjusted gross income (AGI) each must be less than:
- $29,201 ($30,201 for married filing jointly) if you have one qualifying child, or
- $33,178 ($34,178 for married filing jointly) if you have more than one qualifying child.
- Your investment income cannot be more than $2,550.
- Your filing status can be any filing status except married filing separately.
- You cannot be a qualifying child of another person. If you file a joint return, neither
you nor your spouse can be a qualifying child of another person.
- Your qualifying child cannot be used by more than one person to claim the credit. If you
and someone else have the same qualifying child, you and the other person(s) can decide
who will claim the credit using that child. If you cannot agree, see Publication 596.
- You are not filing Form 2555, Foreign Earned Income (or Form 2555-EZ, Foreign
Earned Income Exclusion).
Who is a qualifying child? You
have a qualifying child if your child meets three tests. The tests are:
- Relationship,
- Residency, and
- Age.
Relationship test. To meet the
relationship test for a qualifying child, the child must be your:
- Son, daughter, stepson, stepdaughter, or adopted child (or a descendant of your son,
daughter, stepson, stepdaughter, or adopted child - for example, your grandchild),
- Brother, sister, stepbrother, or stepsister (or the child or grandchild of your brother,
sister, stepbrother, or stepsister) whom you cared for as your own child, or
- Eligible foster child.
See Publication 596 for an explanation of who is an eligible foster child.
Residency test. To meet the residency
test, there are two rules.
- You must have a child who lived with you for more than half the year.
- The home must be in the United States (one of the 50 states or the District of
Columbia). U.S. military personnel stationed outside the United States on extended active
duty are considered to live in the United States for the purposes of the earned income
credit.
Age test. To meet the age test, your
child must be:
- Under age 19 at the end of the year,
- A full-time student under age 24 at the end of the year, or
- Permanently and totally disabled at any time during the tax year, regardless of age.
Persons Who Work and
Do Not Have a Qualifying Child
Generally, if you are a nonresident alien for any part of the year, you cannot claim
the earned income credit. In order to take the earned income credit under this section,
you must meet all the following rules.
- You must have earned income during the year.
- Your earned income and adjusted gross income (AGI) each must be less than $11,060
($12,060 if married filing jointly).
- Your investment income must be $2,550 or less.
- Your filing status can be any filing status except married filing separately.
- You cannot be a qualifying child of another person. If you file a joint return, neither
you nor your spouse can be a qualifying child of another person.
- You (or your spouse if filing a joint return) must be at least age 25 but under
age 65 at the end of the year.
- You cannot be eligible to be claimed as a dependent on anyone else's return. If you file
a joint return, neither you nor your spouse can be eligible to be claimed as a dependent
on anyone else's return.
- Your main home (and your spouse's if filing a joint return) must be in the United States
for more than half the year. U.S. military personnel stationed outside the United States
on extended active duty are considered to live in the United States for the purposes of
the earned income credit.
- You are not filing Form 2555 or Form 2555-EZ.
Advance Earned Income
Credit Payments
If you expect to qualify for the earned income credit in 2003, you
can choose to receive advance payments of part of the credit in your regular
paycheck.
You can request advance payments of the credit for 2003 by completing a 2003 Form W-5.
See Publication 596 or the instructions for Form W-5 for more information on the advance
earned income credit.
You must file
a 2002 return to report what you already received as an advance payment in 2002 and to get
any additional earned income credit.
You must have at
least one qualifying child and qualify for the earned income credit to get the advance
payment of the credit in your pay.
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