Publication 596
Earned Income Credit (EIC)

For use in preparing 2002 Returns

IRS Will Figure the EIC for You

The IRS will figure your EIC for you if you follow the instructions in Figure 3 below. If you want to figure the credit yourself, use EIC Worksheet A or B, whichever applies.

If you have a qualifying child, complete and attach Schedule EIC (discussed on page 23).

Figure 3. Earned Income Credit On Your Tax Return

Earned Income Credit On Your Tax Return

Please do not ask the IRS to figure your EIC unless you are eligible for it. To be eligible, you must meet the rules in this chapter as well as the rules in chapter 1 and either chapter 2 or chapter 3, whichever applies to you. If your credit was reduced or disallowed for any year after 1996, the rules in chapter 5 may apply as well.

You cannot report advance payments of EIC on Form 1040EZ. If you received advance payments of EIC during 2002, you must file Form 1040 or Form 1040A.

Special instructions for clergy, prison inmates, and deferred compensation plans.    Use the following special instructions if one of the following situations applies to you.

Minister or member of a religious order.   If you are filing Schedule SE and line 2 of that schedule includes an amount that is also included on line 7 (Form 1040), print Clergy directly to the right of line 64 (Form 1040). Also show the amount included on both lines (for example, Clergy $800).

Inmates.   If you were an inmate in a penal institution and the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ) includes an amount paid to you for work you performed while an inmate, print PRI and the amount paid on the dotted line next to line 7 (Form 1040), in the space to the left of line 7 (Form 1040A), or in the space to the right of the words W-2 form(s) on line 1 (Form 1040EZ).

Deferred compensation plans.   If the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ) includes a pension or annuity you received from a nonqualified deferred compensation plan or a nongovernmental section 457 plan, put DFC and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of line 7
(Form 1040A) or to the right of the words W-2 form(s) on line 1 (Form 1040EZ). This amount may be reported in box 11 of your Form W-2. If you received such an amount but box 11 is blank, contact your employer for the amount of the pension or annuity.

Note. If you do not have a qualifying child, STOP here and complete your Form 1040, Form 1040A, or Form 1040EZ and mail it to the IRS. If you do have a qualifying child, see Schedule EIC, later.

How To Figure the EIC Yourself

You can use the EIC worksheet in your tax package or EIC Worksheet A or B at the end of this chapter.

If you have a qualifying child, complete and attach Schedule EIC (discussed on page 23).

How To Use EIC Worksheets A and B

Use EIC Worksheet A (page 24) or EIC Worksheet B (pages 25-26) to figure the amount of your EIC. This section explains how to use these worksheets and how to report the EIC on your return.

EIC Worksheet A.   Use EIC Worksheet A if you are not self-employed, a member of the clergy or a church employee who files Schedule SE, or a statutory employee filing Schedule C or C-EZ.

EIC Worksheet B.   Use EIC Worksheet B if you are self-employed, a member of the clergy or a church employee who files Schedule SE, or a statutory employee filing Schedule C or C-EZ. If any of the following situations apply to you, read the paragraph and then complete EIC Worksheet B.

Net earnings from self-employment $400 or more.   If your net earnings from self-employment are $400 or more, be sure to correctly fill out Schedule SE (Form 1040) and pay the proper amount of self-employment tax. If you do not, you may not get all the EIC you are entitled to.

When to use the optional methods of figuring net earnings.   Using the optional methods on Schedule SE to figure your net earnings from self-employment may qualify you for the EIC or give you a larger credit. If your net earnings (without using the optional methods) are less than $1,600, see Publication 533, Self-Employment Tax, and the instructions for Schedule SE, for details about the optional methods.

When both spouses have self-employment income.   You must complete both Parts 1 and 2 of EIC Worksheet B if all of the following conditions apply to you.

1. You are married filing a joint return.
2. Both you and your spouse have income from self-employment.
3. You or your spouse files a Schedule SE and the other spouse does not file Schedule SE.

Statutory employees.   Statutory employees report wages and expenses on Schedule C or C-EZ. They do not file Schedule SE. If you are a statutory employee, enter amounts from Schedule C or C-EZ in Part 3 when you complete EIC Worksheet B.

Special Instructions for Clergy, Prison Inmates, and Deferred Compensation Plans

Use the following special instructions if one of the following situations applies to you.

Minister or member of a religious order.   If you are filing Schedule SE and line 2 of the schedule includes an amount that is also included on line 7 (Form 1040), print Clergy directly to the right of line 64 (Form 1040). Also show the amount included on both lines (for example, Clergy $800).

Inmates.   If you were an inmate in a penal institution and the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ) includes an amount paid to you for work you performed while an inmate, print PRI and the amount paid on the dotted line next to line 7 (Form 1040), in the space to the left of line 7 (Form 1040A), or in the space to the right of the words W-2 form(s) on line 1 (Form 1040EZ).

Deferred compensation plans.   If the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ) includes a pension or annuity you received from a nonqualified deferred compensation plan or a nongovernmental section 457 plan, put DFC and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of line 7, (Form 1040A), or to the right of the words W- 2 form(s) on line 1 (Form 1040EZ). This amount may be reported in box 11 of your Form W- 2. If you received such an amount but box 11 is blank, contact your employer for the amount of the pension or annuity.

Schedule EIC

You must complete and attach Schedule EIC to your tax return if you have a qualifying child and are claiming the EIC. Schedule EIC provides IRS with information about your qualifying children, including their names, ages, SSNs, relationship to you, and the amount of time they lived with you during the year. An example of a filled-in Schedule EIC is shown on page 34.

If you are required to complete and attach Schedule EIC but do not, it will take longer to process your return and issue your refund.

Worksheet 596-Earned Income Credit (EIC)

Worksheet 596-Continued

Worksheet 596-Continued

Disallowance of the EIC

If your earned income credit (EIC) for any year after 1996 was denied (disallowed) or reduced by the IRS, you may need to complete an additional form to claim the credit for 2002.

This chapter is for people whose earned income credit (EIC) for any year after 1996 was denied or reduced by the IRS. If this applies to you and you want to claim the credit for 2002, you may need to complete Form 8862, Information To Claim Earned Income Credit After Disallowance, and attach it to your 2002 return. This chapter explains when you need to attach Form 8862. For more information, see Form 8862 and its instructions.

This chapter also explains the rules for certain people who cannot claim the EIC for a period of years because their EIC was denied or reduced.

Form 8862

If your EIC for any year after 1996 was denied or reduced for any reason other than a mathematical or clerical error, you must attach a completed Form 8862 to your next tax return if you wish to claim the EIC.

However, do not file Form 8862 if:

1. You are claiming the EIC without a qualifying child for 2002, and
2. Your EIC for the earlier year was reduced or disallowed solely because the IRS determined that one or both of the children listed on your Schedule EIC were not your qualifying children for that year.

The date on which your EIC was denied and the date on which you file your 2002 return affect whether you need to attach Form 8862 to your 2002 return or to a later return. The following examples demonstrate whether Form 8862 is required for 2002 or 2003.

Example 1.   You filed your 2001 tax return in March 2002 and claimed the EIC with a qualifying child. The IRS questioned the EIC, and you were unable to prove the child was a qualifying child. In September 2002, you received a statutory notice of deficiency telling you that an adjustment would be assessed unless you filed a petition in the Tax Court within 90 days. You did not act on this notice within 90 days. Therefore, your EIC was denied in December 2002. If you wish to claim the EIC with a qualifying child on your 2002 return, you must complete and attach Form 8862 to that return. However, if you wish to claim the EIC without a qualifying child on your 2002 return, you do not need to file Form 8862.

Example 2.   The facts are the same as in Example 1, except that you received the statutory notice of deficiency in February 2003. Because the 90-day period referred to in the statutory notice is not over when you are ready to file your return for 2002, you should not attach Form 8862 to your 2002 return. However, if you wish to claim the EIC with a qualifying child for 2003, you must complete and attach Form 8862 to your return for that year. If you wish to claim the EIC without a qualifying child for 2003, you do not need to file Form 8862.

Exception for mathematical or clerical errors.   If your EIC was denied or reduced as a result of a mathematical or clerical error, do not attach Form 8862 to your next tax return. For example, if your arithmetic is incorrect, the IRS can correct it. If you do not provide a correct social security number, the IRS can deny the EIC. These kinds of errors are called mathematical or clerical errors.

Omission of Form 8862.   If you are required to attach Form 8862 to your 2002 tax return, and you claim the EIC without attaching a completed Form 8862, your claim will be automatically denied. This is considered a mathematical or clerical error. You will not be permitted to claim the EIC without a completed Form 8862.

Additional documentation may be required.   You may have to provide the IRS with additional documentation before a refund relating to the EIC you claim is released to you, even if you attach a properly completed Form 8862 to your return.

Are You Prohibited From Claiming the EIC for a Period of Years?

If your EIC for any year after 1996 was denied and it was determined that your error was due to reckless or intentional disregard of the EIC rules, then you cannot claim the EIC for the next 2 years. If your error was due to fraud , then you cannot claim the EIC for the next 10 years. The date on which your EIC was denied and the date on which you file your 2002 return affect the years for which you are prohibited from claiming the EIC. The following examples demonstrate which years you are prohibited from claiming the EIC.

Example 3.   You claimed the EIC on your 2001 tax return, which you filed in March 2002. In October 2002, the IRS denied your claim and determined that your error was due to reckless or intentional disregard of the EIC rules. You cannot claim the EIC for tax year 2002 or 2003. If you wish to claim the EIC on your return for 2004, you must complete and attach Form 8862 to your return for that year.

Example 4.   The facts are the same as in Example 3, except that the IRS did not disallow your 2001 EIC until after you filed your 2002 return. You cannot claim the EIC for tax year 2003 or 2004. If you wish to claim the EIC on your return for 2005, you must complete and attach Form 8862 to your return for that year.

Example 5.   You claimed the EIC on your 2001 tax return, which you filed in February 2002. In December 2002, the IRS denied your claim and determined that your error was due to fraud. You cannot claim the EIC for tax years 2002 through 2011. If you wish to claim the EIC on your return for 2012, you must complete and attach Form 8862 to your return for that year.

Advance Payment of EIC in 2003

You can receive part of your 2003 EIC in your paycheck by completing a form and giving it to your employer.

Do you expect to be eligible for the EIC this year (2003) and to have a qualifying child? If so, you can choose to get payments of the EIC in your paycheck now instead of waiting to get your EIC all at once in 2004 when you file your tax return for the year 2003. These payments are called advance EIC payments. This chapter explains how you may be able to get them this year and how to report them on your tax return.

Example.   In March of 2003, John and Tom worked together. Tom told John that he gets $40 added to his paycheck each month because of the earned income credit. John would like to get an extra amount every month too. John needs to find out if he can claim the EIC in 2003. He should answer the questions in Step 1 below and then, if he is eligible for advance EIC payments, go to Step 2.

Note.   Chapters 1 through 5 of this publication are about the EIC you claim on your 2002 tax return. This chapter is about the EIC you expect to claim on your 2003 tax return.

Step 1.   Find Out If You Are Eligible for Advance Payments of the EIC

Answer the following three questions to see if you are eligible for advance payments of the EIC.

Note. When the question says expect, you do not have to know that you will be able to answer Yes when you file your tax return. You can only make a best guess that you will be able to answer Yes.

Question 1.

Do you expect to have a qualifying child? (See the definition of qualifying child beginning on page 10.)

  Yes. Go to Question 2.

  No.  
You cannot get advance payments of the EIC.

Question 2.

Do you expect that your earned income and adjusted gross income (AGI) will each be less than about $30,000 ($31,000 if you expect to file a joint return for 2003)?

  Yes. Go to Question 3.

  No.  
You cannot get advance payments of the EIC.

Question 3.

Do you expect to be eligible for the EIC in 2003 as explained in chapters 1, 2, 3, and 4?

  Yes. Go to Step 2.

  No.  
You cannot get advance payments of the EIC.

Not Sure. Read the rules in chapters 1, 2, 3, and 4 and/or the instructions for Form W-5. Then answer Yes or No.

Note.   The rules in chapters 1, 2, 3, and 4 are expected to be basically the same for 2003, except that you will be allowed to have more earned income and adjusted gross income, and possibly more investment income. The correct amounts for 2003 are in the instructions for the 2003 Form W-5.

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