Reading the instructions that accompany the IRS form 1040 is a mind-numbing experience. But before you despair, let's clear up the confusion over claiming the Earned Income Tax Credit on your income tax return.
As we mentioned earlier, you have to file an income tax return to qualify for the EITC, even if you don't make enough money to owe federal income tax. Line 64a of form 1040 is called "Earned Income Credit (EIC)." That's where you're supposed to enter the amount of your credit, but there are no instructions on the 1040 form itself. That information is found in the lengthy 1040 instruction booklet that you can download here from the Internal Revenue Service.
Jump to page 45 of the 1040 instruction booklet to find information about the EITC. The booklet contains a six-step process for figuring out if you qualify for the credit, how to calculate earned income and how much you can claim in EITC. Step one contains a list of questions designed to weed out people who don't qualify, either because they earn too much money, don't have a Social Security number, have foreign earned income or are married but filing separately.
Step two uses information from your 1040 to figure out how much you earn in investment income. If that number is greater than $3,150, you don't qualify. Step three helps you determine if you have a "qualifying child" under the EITC rules. Step four is for those who are claiming the EITC without a qualifying child. The questions in this step check your income level, age, and U.S. residency status.
Step five is for those claiming the EITC with a qualifying child. This step helps you determine your earned income. If you are self-employed, the instructions tell you to jump to Worksheet B to determine your EITC. If you earned wage, salary and tip income as an employee of someone else, then you have a choice. You can have the IRS figure out your EITC or you can complete Worksheet A and do it yourself. If you want the IRS to do the math for you, simply write "EIC" on the dotted line next to line 64a on form 1040. If you're feeling lucky, proceed to Worksheet A.
Worksheet A helps you decide whether to use the earned income amount you calculated in step five or your adjusted gross income (AGI) entered on line 38 of your 1040. When you settle on a number to use, consult the Earned Income Credit Table (also in the instruction booklet) that corresponds to your income level, filing status and family size. That number is the figure you will enter on line 64a of the 1040. If you are self-employed, you will use Worksheet B to determine your earned income number and EITC amount.
One last thing: If you are claiming qualifying children for your EITC, you need to complete and attach Schedule EIC, a separate tax form from the 1040. Still confused? Perhaps this is why only four out of five eligible families claimed the EITC in 2010 [source: IRS].