The eight chapters in this part explain how to figure your tax and how to figure the tax of certain children who have more than $1,700 of investment income. They also discuss tax credits that, unlike deductions are subtracted directly from your tax and reduce your tax, dollar for dollar. Chapter 36 discusses the earned income credit and how you may be able to get part of the credit paid to you in advance throughout the year.
After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. This chapter discusses:
Your income tax is based on your taxable income. After you figure your income tax and any alternative minimum tax, subtract your tax credits and add any other taxes you may owe. The result is your total tax. Compare your total tax with your total payments to determine whether you are entitled to a refund or owe additional tax.
This section provides a general outline of how to figure your tax. You can find step-by-step directions in the instructions for Forms 1040EZ, 1040A, and 1040. If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1.
Tax. Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. However, there are special methods if your income includes any of the following items.
Credits. After you figure your income tax and any alternative minimum tax (discussed later), determine your tax credits. This chapter does not explain whether you are eligible for these credits. You can find that information in chapters 32 through 37 and your form instructions. See the following table for credits you may be able to subtract from your income tax.
Credits
See
For information on: chapter:
Adoption 37
Alternative motor vehicle 37
Alternative fuel vehicle refueling
property 37
Child and dependent care 32
Child tax credit 34
Clean renewable energy bonds 37
Education 35
Elderly or disabled 33
Foreign tax 37
Gulf tax credit bonds 37
Mortgage interest 37
Prior year minimum tax 37
Retirement savings
contributions 37
Residential energy 37
Some credits (such as the earned income credit) are not listed above because they are treated as payments. See Payments, later.
There are other credits that are not discussed in this publication. These include the following credits.
Other taxes. After you subtract your tax credits, determine whether there are any other taxes you must pay. This chapter does not explain these other taxes. You can find that information in other chapters of this publication and your form instructions. See the following table for other taxes you may need to add to your income tax.
Other Taxes
See
For information on: chapter:
Additional taxes on qualified retirement
plans and IRAs 10, 17
Advance earned income credit
payments 36
Household employment taxes 32
Recapture of an education credit 35
Social security and Medicare tax on
wages 5
Social security and Medicare tax on
tips 6
Uncollected social security and
Medicare tax on tips 6
Another tax you may have to pay, the alternative minimum tax, is discussed later in this chapter.
There are other taxes that are not discussed in this publication. These include the following items.
Payments. After you determine your total tax, figure the total payments you have already made for the year. Include credits that are treated as payments. This chapter does not explain these payments and credits. You can find that information in other chapters of this publication and your form instructions. See the following table for amounts you can include in your total payments.
Payments
See
For information on: chapter:
Child tax credit (additional) 34
Earned income credit 36
Estimated tax paid 4
Excess social security
and RRTA tax withheld 37
Federal income tax withheld 4
Health coverage tax credit 37
Regulated investment company
credit 37
Refundable credit for
prior year minimum tax 37
Tax paid with extension 1
Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. It is claimed on Form 1040, line 70. See Form 4136, Credit for Federal Tax Paid on Fuels.
Refund or balance due. To determine whether you are entitled to a refund or owe additional tax, compare your total payments with your total tax. If you are entitled to a refund, see your form instructions for information on having it directly deposited into one or more of your accounts instead of receiving a paper check.
This section briefly discusses an additional tax you may have to pay.
The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax. This additional tax is called the alternative minimum tax (AMT).
You may have to pay the alternative minimum tax if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than:
Caution: At the time this publication went to print, Congress was considering legislation that would increase the amounts above. To find out if legislation was enacted, and for more details, see the Instructions for Form 6251.
Adjustments and tax preference items. The more common adjustments and tax preference items include:
More information. For more information about the alternative minimum tax, see the instructions for Form 1040, line 45, and Form 6251, Alternative Minimum Tax -- Individuals.
If you file by April 15, 2008, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040.
If the IRS figures your tax and you paid too much, you will receive a refund. If you did not pay enough, you will receive a bill for the balance. To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later.
When the IRS cannot figure your tax. The IRS cannot figure your tax for you if any of the following apply.
After you complete the line entries for the tax form you are filing, as discussed next, attach the peel-off label. If you do not have a peel-off label, fill in your name and address. Enter your social security number in the space provided. If you are married, enter the social security numbers of you and your spouse even if you file separately. Complete the "Third Party Designee" area of the return if you would like another person to discuss your return with the IRS. Sign and date your return and enter your occupation(s). If you are filing a joint return, both you and your spouse must sign it. Enter your daytime phone number in the space provided.
Attach a copy of each of your Forms W-2 to your return. Also attach any Form 1099-R you received that has withholding tax in box 4.
Mail your return to the Internal Revenue Service Center for the area where you live. A list of Service Center addresses is shown near the end of this publication.
Form 1040EZ Line Entries
Read lines 1 through 8b and fill in the lines that apply to you. Do not complete lines 9 through 12. If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income.
Payments. Enter any federal income tax withheld on line 7. Federal income tax withheld is shown on Form W-2, box 2.
Earned income credit. If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. Enter "EIC" in the space to the left of line 8a. Enter the nontaxable combat pay you elect to include in earned income on line 8b.
If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. For details, see the Form 1040EZ instructions.
Form 1040A Line Entries
Read lines 1 through 27 and fill in the lines that apply to you. If you are filing a joint return, use the space to the left of the entry space for line 27 to separately show your taxable income and your spouse's taxable income. Do not complete line 28. Complete lines 29 through 33, 36, and 38 through 41 if they apply to you. Do not fill in lines 30 and 40a if you want the IRS to figure the credits shown on those lines. Also, enter any write-in information that applies to you in the space to the left of line 42. Do not complete lines 34, 35, 37, and 43 through 47.
Payments. Enter any federal income tax withheld that is shown on Form W-2, box 2, or the appropriate box of Form 1099, on line 38. Enter any estimated tax payments you made on line 39.
Credit for child and dependent care expenses. If you can take this credit, as discussed in chapter 32, complete Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers, and attach it to your return. Enter the amount of the credit on line 29. The IRS will not figure this credit.
Credit for the elderly or the disabled. If you can take this credit, as discussed in chapter 33, attach Schedule 3 (Form 1040A), Credit for the Elderly or the Disabled for Form 1040A Filers. Enter "CFE" in the space to the left of line 30. The IRS will figure this credit for you. On Schedule 3, check the box in Part I for your filing status and age. Complete Part II and Part III, lines 11 and 13, if they apply.
Earned income credit. If you can take this credit, as discussed in chapter 36, the IRS will figure it for you. Enter "EIC" to the left of the entry space for line 40a. Enter the nontaxable combat pay you elect to include in earned income on line 40b. If you have a qualifying child, you must fill in Schedule EIC, Earned Income Credit, and attach it to your return.
If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. For details, see the Form 1040A instructions.
Form 1040 Line Entries
Read lines 1 through 43 and fill in the lines that apply to you. Do not complete line 44.
If you are filing a joint return, use the space under the words "Adjusted Gross Income" on the front of your return to separately show your taxable income and your spouse's taxable income.
Read lines 45 through 71. Fill in the lines that apply to you, but do not fill in lines 56, 63, and 72. Also, do not complete line 57 and lines 73 through 77. Do not fill in lines 48 and 66a if you want the IRS to figure the credits shown on those lines.
Fill in any forms or schedules asked for on the lines you completed, and attach them to your return.
Payments. Enter any federal income tax withheld that is shown on Form W-2, box 2, or the appropriate box of Form 1099, on line 64. Enter any estimated tax payments you made on line 65.
Credit for child and dependent care expenses. If you can take this credit, as discussed in chapter 32, complete Form 2441, Child and Dependent Care Expenses, and attach it to your return. Enter the amount of the credit on line 47. The IRS will not figure this credit.
Credit for the elderly or the disabled. If you can take this credit, as discussed in chapter 33, attach Schedule R, Credit for the Elderly or the Disabled. Enter "CFE" on the dotted line next to Form 1040, line 48. The IRS will figure the credit for you. On Schedule R check the box in Part I for your filing status and age. Complete Part II and Part III, lines 11 and 13, if they apply.
Earned income credit. If you can take this credit, as discussed in chapter 36, the IRS will figure it for you. Enter "EIC" on the dotted line next to Form 1040, line 66a. Enter the nontaxable combat pay you elect to include in earned income on line 66b. If you have a qualifying child, you must fill in Schedule EIC and attach it to your return.
If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. For details, see the Form 1040 instructions.
Increase in age of children whose investment income is taxed at parent's rate. The rules regarding the age of a child whose investment income may be taxed at the parent's tax rate will change for 2008. These rules will continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply to a child who is age 18 at the end of the year, or a student under age 24 at the end of the year, whose earned income is not more than half of the child's support.
This chapter discusses the following two rules that may affect the tax on certain investment income of a child under age 18.
For these rules, the term "child" includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent.
These rules do not apply if:
Useful Items
You may want to see:
Publication
Form (and Instructions)
If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the investment income of a child under age 18. The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700.
Parents Who Do Not File a Joint Return
For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax.
Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends.
Parents are married. If the child's parents file separate returns, use the return of the parent with the greater taxable income.
Parents not living together. If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income.
For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2.
Parents are divorced. If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent.
Custodial parent remarried. If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial parent.
If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies.
Parents never married. If a child's parents did not marry each other, but lived together all year, use the return of the parent with the greater taxable income. If the parents did not live together all year, the rules explained earlier under Parents are divorced apply.
Widowed parent remarried. If a widow or widower remarries, the new spouse is treated as the child's other parent. The rules explained earlier under Custodial parent remarried apply.
You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return.
You can make this election for 2007 only if all the following conditions are met.
These conditions are also shown in Figure 31-A.
[The following graphic has not been reproduced:
Figure 31-A. Can You Include Your Child's Income On Your Tax Return?]
How to make the election. Make the election by attaching Form 8814 to your Form 1040. (If you make this election, you cannot file Form 1040A or Form 1040EZ.) Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children and not for others.
Effect of Making the Election
The federal income tax on your child's income may be more if you make the Form 8814 election.
Rate may be higher. If your child received qualified dividends or capital gain distributions, you may pay up to $42.50 more tax if you make this election instead of filing a separate tax return for the child. This is because the tax rate on the child's income between $850 and $1,700 is 10% if you make this election. However, if you file a separate return for the child, the tax rate may be as low as 5% because of the preferential tax rates for qualified dividends and capital gain distributions.
Deductions you cannot take. By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return.
Reduced deductions or credits. If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following.
Penalty for underpayment of estimated tax. If you make this election for 2007 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. If you plan to make this election for 2008, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. See chapter 4 for more information.
Figuring Child's Income
Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Only the amount over $1,700 is added to your income. The amount over $1,700 is shown on Form 8814, line 6. Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Include the amount from Form 8814, line 12, on Form 1040, line 21. Enter "Form 8814" in the space next to line 21. If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21.
Capital gain distributions and qualified dividends. If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Part 2 of Publication 929. If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Part 2 of Publication 929.
Figuring Additional Tax
Use Form 8814, Part II, to figure the tax on the $1,700 of your child's interest and dividends that you do not include in your income. This tax is added to the tax figured on your income.
This additional tax is the smaller of:
Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Check box a on Form 1040, line 44.
Illustrated Example
David and Linda Parks are married and will file separate tax returns for 2007. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $1,650 taxable interest income and a Form 1099-DIV showing $1,150 ordinary dividends. All the dividends were qualified dividends. His parents decide to include that income on one of their returns so they will not have to file a return for Philip.
First, David and Linda each figure their taxable income (Form 1040, line 43) without regard to Philip's income. David's taxable income is $56,700 and Linda's is $74,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return. See Which Parent's Return To Use, earlier.
On Form 8814 (see illustrated form), Linda enters her name and social security number, then Philip's name and social security number. She enters Philip's taxable interest income, $1,650, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. She enters Philip's ordinary dividends, $1,150, on line 2a. All of Philip's ordinary dividends were qualified dividends, so Linda also enters $1,150 on line 2b. Philip did not have any capital gain distributions, so she leaves line 3 blank.
Linda adds lines 1a and 2a and enters the result, $2,800, on line 4. Because Philip had qualified dividends, Linda must complete lines 7 through 11 of Form 8814. She includes the amount from line 9 of Form 8814 ($452) on lines 9a and 9b of her Form 1040. On the dotted lines next to lines 9a and 9b, she enters "Form 8814-$452."
Linda includes $648 in the total on line 21 of her Form 1040 (not illustrated) and in the space next to that line writes "Form 8814 -- $648." Adding that amount, plus the $452 of qualified dividends, to her income increases each of the amounts on lines 22, 37, 38, 41, and 43 of her Form 1040 by $1,100. Linda is not claiming any deductions that are affected by the increase to her income. Therefore, her revised taxable income on line 43 is $75,400 ($74,300 + $452 + $648).
On Form 8814, Linda subtracts the $850 shown on line 13 from the $2,800 on line 4 and enters the result, $1,950, on line 14. Because that amount is not less than $850, she enters $85 on line 15. This is the tax on the first $1,700 of Philip's income, which Linda did not have to add to her income. She must add this additional tax to the tax figured on her revised taxable income.
The tax on her $75,400 revised taxable income, figured using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, is $15,543. She adds $85, and enters the $15,628 total on Form 1040, line 44, and checks box a.
Linda attaches Form 8814 to her Form 1040.
[The following graphic has not been reproduced:
2007 Parks' Example Form 8814, Parents' Election To Report Child's Interest and Dividends]
Part of a child's 2007 investment income may be subject to tax at the parent's tax rate if all of the following statements are true.
These conditions are also shown in Figure 31-B.
[The following graphic has not been reproduced:
Figure 31-B. Do You Have To Use Form 8615 To Figure Your Child's Tax?]
If neither parent was alive on December 31, 2007, do not use Form 8615. Instead, figure the child's tax in the normal manner.
If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Attach the completed form to the child's Form 1040 or Form 1040A.
The following discussions explain the parental information needed for Form 8615 and the steps to follow in figuring the child's tax. Form 8615 is illustrated later.
Providing Parental Information (Form 8615, lines A--C)
On Form 8615, lines A and B, enter the parent's name and social security number. (If the parents filed a joint return, enter the name and social security number listed first on the joint return.) On line C, check the box for the parent's filing status.
See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615.
Parent with different tax year. If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year.
Parent's return information not known timely. If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates.
You can use any reasonable estimate. This includes using information from last year's return. If you use an estimated amount on Form 8615, enter "Estimated" on the line next to the amount.
When you get the correct information, file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Extensions are discussed in chapter 1.
Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)
The first step in figuring a child's tax using Form 8615 is to figure the child's net investment income. To do that, use Form 8615, Part I.
Line 1 (investment income). If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Form 1040EZ cannot be used if Form 8615 must be filed.
If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form.
However, if the child has excluded any foreign earned income or deducted either a loss from self-employment or a net operating loss from another year, use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1.
Investment income defined. Investment income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, and certain distributions from trusts. Investment income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
Nontaxable income. For this purpose, investment income includes only amounts that the child must include in total income. Nontaxable investment income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included.
Income from property received as a gift. A child's investment income includes all income produced by property belonging to the child. This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it.
A child's investment income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.
Example. Amanda Black, age 13, received the following income.
The dividends were qualified dividends on stock given to her by her grandparents.
Amanda's investment income is $1,900. This is the total of the dividends ($600), taxable interest ($1,200), and net capital gains ($100). Her wages are earned (not investment) income because they are received for work actually done. Her tax-exempt interest is not included because it is nontaxable.
Trust income. If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other investment income from the trust are investment income to the child.
However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not investment income.
Line 2 (deductions). If the child does not itemize deductions on Schedule A (Form 1040), enter $1,700 on line 2.
If the child does itemize deductions, enter on line 2 the larger of:
Directly connected. Itemized deductions are directly connected with the production of investment income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees.
These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Only the amount greater than 2% of the child's adjusted gross income can be deducted. See chapter 28 for more information.
Example 1. Roger, age 12, has investment income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his investment income. His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Line 2 is $1,700 because that is more than the sum of $850 and his directly-connected itemized deductions of $300.
Example 2. Eleanor, age 8, has investment income of $16,000 and an early withdrawal penalty of $100. She has no other income. She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her investment income. Her adjusted gross income, entered on line 1, is $15,900 ($16,000 - $100). The amount on line 2 is $1,900. This is the larger of:
Line 3. Subtract line 2 from line 1 and enter the result on this line. If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner.
Line 4 (child's taxable income). Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27.
However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion or housing exclusion, see the Form 8615 instructions.
Line 5 (net investment income). A child's net investment income cannot be more than his or her taxable income. Enter on Form 8615, line 5, the smaller of line 3 or line 4. This is the child's net investment income.
If zero or less, do not complete the rest of the form. However, you must still attach Form 8615 to the child's tax return. Figure the tax on the child's taxable income in the normal manner.
Step 2. Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)
The next step in completing Form 8615 is to figure a tentative tax on the child's net investment income at the parent's tax rate. The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net investment income (plus the net investment income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it.
When figuring the tentative tax at the parent's tax rate, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net investment income. For example, do not refigure the medical expense deduction.
Figure the tentative tax on Form 8615, lines 6 through 13.
Note. If the child has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II.
Line 7 (net investment income of other children). If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Do not include the amount from line 5 of the Form 8615 being completed.
Example. Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. The children's net investment income amounts on line 5 of their Forms 8615 are:
Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615.
Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000).
Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600).
Other children's information not available. If the net investment income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. See Parent's return information not known timely, earlier.
Line 11 (tentative tax). Subtract line 10 from line 9 and enter the result on this line. This is the tentative tax.
If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Also skip the discussion for lines 12a and 12b that follows.
Lines 12a and 12b (dividing the tentative tax). If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net investment income. This is done on lines 12a, 12b, and 13. Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Divide the amount on line 5 by the amount on line 12a and enter the result as a decimal on line 12b.
Example. In the earlier example under Line 7 (net investment income of other children), Sharon's Form 8615 shows $1,600 on line 7. The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). The decimal on line 12b is .333, figured as follows and rounded to three places.
$800
------ = .333
$2,400
Step 3. Figuring the Child's Tax (Form 8615, Part III)
The final step in figuring a child's tax using Form 8615 is to determine the larger of:
This is the child's tax. It is figured on Form 8615, lines 14 through 18.
Alternative minimum tax. A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. See Alternative Minimum Tax in chapter 30.
For more information on who is liable for AMT and how to figure it, get Form 6251, Alternative Minimum Tax -- Individuals. For information on special limits that apply to a child who files Form 6251, see Alternative Minimum Tax in Publication 929.
Illustrated Example
The following example includes a completed Form 8615. Form 1040A is not shown.
John and Laura Brown have one child, Sara. She is 13 and has $2,800 taxable interest income and $1,500 earned income. She does not itemize deductions. John and Laura file a joint return with John's name and social security number listed first. They claim three exemptions, including an exemption for Sara, on their return.
Because Sara is under age 18 and has more than $1,700 investment income, part of her income may be subject to tax at her parents' rate. A completed Form 8615 must be attached to her return.
Sara's father, John, fills out Sara's return for her. He completes her Form 1040A through line 27, then begins completing her Form 8615.
John enters his name and social security number on Sara's Form 8615 because his name and number are listed first on the joint return he and Laura are filing. He checks the box for married filing jointly.
He enters Sara's investment income, $2,800, on line 1. Sara does not itemize deductions, so John enters $1,700 on line 2. He enters $1,100 ($2,800 - $1,700) on line 3.
Sara's taxable income, as shown on her Form 1040A, line 27, is $2,500. This is her total income ($4,300) minus her standard deduction ($1,800). Her standard deduction is limited to the amount of her earned income plus $300. John enters $2,500 on line 4.
John compares lines 3 and 4 and enters the smaller amount, $1,100, on line 5.
John enters $48,000 on line 6. This is the taxable income from line 43 of John and Laura's joint Form 1040 return. Sara is an only child, so line 7 is blank. He adds line 5 ($1,100), line 6 ($48,000), and line 7 (blank), and enters $49,100 on line 8.
Using the column for married filing jointly in the Tax Table, John finds the tax on $49,100. He enters the tax, $6,586, on line 9. He enters $6,421 on line 10. This is the tax from line 44 of John and Laura's Form 1040. He enters $165 on line 11 ($6,586 - $6,421).
Because line 7 is blank, John skips lines 12a and 12b and enters $165 on line 13.
John subtracts line 5 ($1,100) from line 4 ($2,500) and enters the result, $1,400, on line 14. Using the column for single filing status in the Tax Table, John finds the tax on $1,400 and enters this tax, $141, on line 15. He adds lines 13 ($165) and 15 ($141) and enters $306 on line 16.
Using the column for single filing status in the Tax Table, John finds the tax on $2,500 (line 4) and enters this tax, $251, on line 17.
John compares lines 16 and 17 and enters the larger amount, $306, on line 18 of Sara's Form 8615. He also enters that amount on line 28 of Sara's Form 1040A.
John also completes Schedule 1 (Form 1040A) for Sara.
[The following graphic has not been reproduced:
2007 Browns' Example Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700]
New credit limit applies. The credit for child and dependent care expenses is no longer allowed against the alternative minimum tax (AMT). See Limit on credit for more information.
Caution: At the time this publication went to print, Congress was considering legislation that would allow the credit against the AMT. To find out if the legislation was enacted, and for more details, see the Instructions for Form 2441.
New definition of earned income. When you figure your credit for child and dependent care expenses, your earned income no longer includes employee compensation that is nontaxable. However, you can elect to include any nontaxable combat pay in earned income to figure your credit. See Earned Income Test.
Part-time work and temporary absences from work. You may be able to figure your credit using expenses for care while you were temporarily absent from work or working part-time. See Working or Looking for Work.
Taxpayer identification number needed for each qualifying person. You must include on line 2 of Form 2441 or Schedule 2 (Form 1040A) the name and taxpayer identification number (generally the social security number) of each qualifying person. See Taxpayer identification number under Qualifying Person Test, later.
You may have to pay employment taxes. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. See Employment Taxes for Household Employers, later.
This chapter discusses the credit for child and dependent care expenses and covers the following topics.
You may be able to claim the 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 35% of your expenses. To qualify, you must pay these expenses so you can work or look for work.
Caution: This credit should not be confused with the child tax credit discussed in chapter 34.
Dependent care benefits. If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. You must complete Part III of Form 2441 or Schedule 2 (Form 1040A) before you can figure the amount of your credit. See Dependent Care Benefits under How To Figure the Credit, later.
Useful Items
You may want to see:
Publication
Form (and Instructions)
To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests.
(See Payments to Relatives or Dependents under Work-Related Expense Test, later.)
These tests are presented in Figure 32-A and are also explained in detail in this chapter.
[The following graphic has not been reproduced:
Figure 32-A. Can You Claim the Credit?]
Your child and dependent care expenses must be for the care of one or more qualifying persons.
A qualifying person is:
Note. If you are divorced or separated, see Child of divorced or separated parents or parents living apart, later, to determine which parent may treat the child as a qualifying person.
Dependent defined. A dependent is a person, other than you or your spouse, for whom you can claim an exemption. To be your dependent, a person must be your qualifying child (or your qualifying relative).
Qualifying child. To be your qualifying child, a child must live with you for more than half the year and meet other requirements.
More information. For more information about who is a dependent or a qualifying child, see chapter 3.
Physically or mentally not able to care for oneself. Persons who cannot dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves.
Person qualifying for part of year. You determine a person's qualifying status each day. For example, if the person for whom you pay child and dependent care expenses no longer qualifies on September 16, count only those expenses through September 15. Also see Yearly Limit under Dollar Limit, later.
Taxpayer identification number. You must include on your return the name and taxpayer identification number (generally the social security number) of the qualifying person(s). If the correct information is not shown, the credit may be reduced or disallowed.
Individual taxpayer identification number (ITIN) for aliens. If your qualifying person is a nonresident or resident alien who does not have and cannot get a social security number (SSN), use that person's ITIN. The ITIN is entered wherever an SSN is requested on a tax return. To apply for an ITIN, see Form W-7.
An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U.S. law.
Adoption taxpayer identification number (ATIN). If your qualifying person is a child who was placed in your home for adoption and for whom you do not have an SSN, you must get an ATIN for the child. File Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions.
Child of divorced or separated parents or parents living apart. Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if:
The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents.
To claim the credit, you (and your spouse if you are married) must have earned income during the year.
Earned income. Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.
Generally, only taxable compensation is included. However, you can elect to include nontaxable combat pay in earned income. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. You should figure your credit both ways and make the election if it gives you a greater tax benefit.
Members of certain religious faiths opposed to social security. Certain income earned by persons who are members of certain religious faiths that are opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes may not be considered earned income for this purpose. See Earned Income Test in Publication 503.
Not earned income. Earned income does not include:
Rule for student-spouse or spouse not able to care for self. Your spouse is treated as having earned income for any month that he or she is:
Figure the earned income of the nonworking spouse described under (1) or (2) above as explained under Earned Income Limit, later.
This rule applies to only one spouse for any one month. If, in the same month, both you and your spouse do not work and are either full-time students or physically or mentally not able to care for yourselves, only one of you can be treated as having earned income in that month.
Full-time student. You are a full-time student if you are enrolled at a school for the number of hours or classes that the school considers full time. You must have been a student for some part of each of 5 calendar months during the year. (The months need not be consecutive.)
School. The term "school" includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. A school does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
Work-Related Expense Test
Child and dependent care expenses must be work-related to qualify for the credit. Expenses are considered work-related only if both of the following are true.
Working or Looking for Work
To be work-related, your expenses must allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work. Your spouse is treated as working during any month he or she is a full-time student or is physically or mentally not able to care for himself or herself.
Your work can be for others or in your own business or partnership. It can be either full time or part time.
Work also includes actively looking for work. However, if you do not find a job and have no earned income for the year, you cannot take this credit. See Earned Income Test, earlier.
An expense is not considered work-related merely because you had it while you were working. The purpose of the expense must be to allow you to work. Whether your expenses allow you to work or look for work depends on the facts.
Example 1. The cost of a babysitter while you and your spouse go out to eat is not normally a work-related expense.
Example 2. You work during the day. Your spouse works at night and sleeps during the day. You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. Your expenses are considered work-related.
Volunteer work. For this purpose, you are not considered to be working if you do unpaid volunteer work or volunteer work for a nominal salary.
Work for part of year. If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work-related. However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2 1/2 months × $250).
Temporary absence from work. You do not have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. Instead, you can figure your credit including the expenses you paid for the period of absence.
An absence of 2 weeks or less is a short, temporary absence. An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances.
Example. You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. You become ill and miss 4 months of work but receive sick pay. You continue to pay the nanny to care for the children while you are ill. Your absence is not a short, temporary absence, and your expenses are not considered work-related.
Part-time work. If you work part-time, you generally must figure your expenses for each day. However, if you have to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses you paid for days you did not work. Any day when you work at least 1 hour is a day of work.
Example 1. You work 3 days a week. While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. You can pay the center $150 for any 3 days a week or $250 for 5 days a week. Your child attends the center 5 days a week. Your work-related expenses are limited to $150 a week.
Example 2. The facts are the same as in Example 1 except the center does not offer a 3-day option. The entire $250 weekly fee may be a work-related expense.
Care of a Qualifying Person
To be work-related, your expenses must be to provide care for a qualifying person.
You do not have to choose the least expensive way of providing care. The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost.
Expenses are for the care of a qualifying person only if their main purpose is the person's well-being and protection.
Expenses for household services qualify if part of the services is for the care of qualifying persons. See Household services, later.
Expenses not for care. Expenses for care do not include amounts you pay for food, lodging, clothing, education, and entertainment. However, you can include small amounts paid for these items if they are incident to and cannot be separated from the cost of caring for the qualifying person.
Education. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are expenses for care. Expenses to attend kindergarten or a higher grade are not expenses for care. Do not use these expenses to figure your credit.
However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care.
Summer school and tutoring programs are not for care.
Example 1. You take your 3-year-old child to a nursery school that provides lunch and educational activities as a part of its preschool childcare service. The lunch and educational activities are incident to the childcare, and their cost cannot be separated from the cost of care. You can count the total cost when you figure the credit.
Example 2. You place your 10-year-old child in a boarding school so you can work full time. Only the part of the boarding school expense that is for the care of your child is a work-related expense. You can count that part of the expense in figuring your credit if it can be separated from the cost of education. You cannot count any part of the amount you pay the school for your child's education.
Care outside your home. You can count the cost of care provided outside your home if the care is for your dependent under age 13 or any other qualifying person who regularly spends at least 8 hours each day in your home.
Dependent care center. You can count care provided outside your home by a dependent care center only if the center complies with all state and local regulations that apply to these centers.
A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit.
Camp. The cost of sending your child to an overnight camp is not considered a work-related expense. The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer.
Transportation. If a care provider takes a qualifying person to or from a place where care is provided, that transportation is for the care of the qualifying person. This includes transportation by bus, subway, taxi, or private car. However, transportation not provided by a care provider is not for the care of a qualifying person. Also, if you pay the transportation cost for the care provider to come to your home, that expense is not for care of a qualifying person.
Fees and deposits. Fees you paid to an agency to get the services of a care provider, deposits you paid to an agency or pre-school, application fees, and other indirect expenses are work-related expenses if you have to pay them to get care, even though they are not directly for care. However, a forfeited deposit is not for the care of a qualifying person if care is not provided.
Example 1. You paid a fee to an agency to get the services of the nanny who cares for your 2-year-old daughter while you work. The fee you paid is a work-related expense.
Example 2. You placed a deposit with a pre-school to reserve a place for your 3-year-old child. You later sent your child to a different pre-school and forfeited the deposit. The forfeited deposit is not for care and so is not a work-related expense.
Household services. Expenses you pay for household services meet the work-related expense test if they are at least partly for the well-being and protection of a qualifying person.
Household services are ordinary and usual services done in and around your home that are necessary to run your home. They include the services of a housekeeper, maid, or cook. However, they do not include the services of a chauffeur, bartender, or gardener. See Household Services in Publication 503 for more information.
In this chapter, the term housekeeper refers to any household employee whose services include the care of a qualifying person.
Taxes paid on wages. The taxes you pay on wages for qualifying child and dependent care services are work-related expenses. See Employment Taxes for Household Employers, later.
Payments to Relatives or Dependents
You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. However, do not count any amounts you pay to:
Generally, married couples must file a joint return to take the credit. However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit.
Legally separated. You are not considered married if you are legally separated from your spouse under a decree of divorce or separate maintenance. You are eligible to take the credit on a separate return.
Married and living apart. You are not considered married and are eligible to take the credit if all the following apply.
Costs of keeping up a home. The costs of keeping up a home normally include property taxes, mortgage interest, rent, utility charges, home repairs, insurance on the home, and food eaten at home.
The costs of keeping up a home do not include payments for clothing, education, medical treatment, vacations, life insurance, transportation, or mortgage principal.
They also do not include the purchase, permanent improvement, or replacement of property. For example, you cannot include the cost of replacing a water heater. However, you can include the cost of repairing a water heater.
Death of spouse. If your spouse died during the year and you do not remarry before the end of the year, you generally must file a joint return to take the credit. If you do remarry before the end of the year, the credit can be claimed on your deceased spouse's separate return.
You must identify all persons or organizations that provide care for your child or dependent. Use Part I of Form 2441 or Schedule 2 (Form 1040A) to show the information.
Information needed. To identify the care provider, you must give the provider's:
If the care provider is an individual, the taxpayer identification number is his or her social security number or individual taxpayer identification number. If the care provider is an organization, then it is the employer identification number (EIN).
You do not have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case, enter "Tax-Exempt" in the space where the tax form calls for the number.
If you cannot provide all of the information or if the information is incorrect you must be able to show that you used due diligence (discussed later) in trying to furnish the necessary information.
Getting the information. You can use Form W-10 to request the required information from the care provider. If you do not use Form W-10, you can get the information from:
Records: You should keep this information with your tax records. Do not send Form W-10 (or other document containing this information) to the Internal Revenue Service.
Due diligence. If the care provider information you give is incorrect or incomplete, your credit may not be allowed. However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit.
You can show due diligence by getting and keeping the provider's completed Form W-10 or one of the other sources of information listed earlier. Care providers can be penalized if they do not provide this information to you or if they provide incorrect information.
Provider refusal. If the provider refuses to give you their identifying information, you should report whatever information you have (such as the name and address) on the form you use to claim the credit. Enter "See Attached Statement" in the columns calling for the information you do not have. Then attach a statement explaining that you requested the information from the care provider, but the provider did not give you the information. Be sure to write your name and social security number on this statement. The statement will show that you used due diligence in trying to furnish the necessary information.
Your credit is a percentage of your work-related expenses. Your expenses are subject to the earned income limit and the dollar limit. The percentage is based on your adjusted gross income.
Figuring Total Work-Related Expenses
To figure the credit for 2007 work-related expenses, count only those you paid by December 31, 2007.
Expenses prepaid in an earlier year. If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Claim the expenses for the later year as if they were actually paid in that later year.
Expenses not paid until the following year. Do not count 2006 expenses that you paid in 2007 as work-related expenses for 2007. You may be able to claim an additional credit for them on your 2007 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit in Publication 503.
Tip: If you had expenses in 2007 that you did not pay until 2008, you cannot count them when figuring your 2007 credit. You may be able to claim a credit for them on your 2008 return.
Expenses reimbursed. If a state social services agency pays you a nontaxable amount to reimburse you for some of your child and dependent care expenses, you cannot count the expenses that are reimbursed as work-related expenses.
Example. You paid work-related expenses of $3,000. You are reimbursed $2,000 by a state social services agency. You can use only $1,000 to figure your credit.
Medical expenses. Some expenses for the care of qualifying persons who are not able to care for themselves may qualify as work-related expenses and also as medical expenses. You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction.
If you use these expenses to figure the credit and they are more than the earned income limit or the dollar limit, discussed later, you can add the excess to your medical expenses. However, if you use your total expenses to figure your medical expense deduction, you cannot use any part of them to figure your credit.
Caution: Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction.
Dependent Care Benefits
If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. See Reduced Dollar Limit, later. But, even if you cannot take the credit, you may be able to take an exclusion or deduction for the dependent care benefits.
Dependent care benefits. Dependent care benefits include:
Your salary may have been reduced to pay for these benefits. If you received benefits as an employee, they should be shown on your W-2 form. See Statement for employee, later. Benefits you received as a partner should be shown in box 13 of your Schedule K-1 (Form 1065) with code N. Enter the amount of these benefits on the first line of Part III of Form 2441.
Exclusion or deduction. If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Your employer can tell you whether your benefit plan qualifies. To claim the exclusion, you must complete Part III of either Form 2441 or Schedule 2 (Form 1040A). You cannot use Form 1040EZ.
If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you would not get an exclusion from wages. Instead, you would get a deduction on Form 1040, Schedule C, line 14; Schedule E, line 18 or 28; or Schedule F, line 17. To claim the deduction, you must use Form 2441.
The amount you can exclude or deduct is limited to the smallest of:
The definition of earned income for the exclusion or deduction is the same as the definition used when figuring the credit except that earned income for the exclusion or deduction does not include any dependent care benefits you receive. See the instructions for Form 2441 or Schedule 2 (Form 1040A).
Statement for employee. Your employer must give you a Form W-2 (or similar statement) showing in box 10 the total amount of dependent care benefits provided to you during the year under a qualified plan. Your employer will also include any dependent care benefits over $5,000 in your wages shown on your Form W-2 in box 10.
Effect of exclusion. If you exclude dependent care benefits from your income, the amount of the excluded benefits:
Earned Income Limit
The amount of work-related expenses you use to figure your credit cannot be more than:
Earned income is defined under Earned Income Test, earlier.
Tip: For purposes of item (2), use your spouse's earned income for the entire year, even if you were married for only part of the year.
Separated spouse. If you are legally separated or married and living apart from your spouse (as described under Joint Return Test, earlier), you are not considered married for purposes of the earned income limit. Use only your income in figuring the earned income limit.
Surviving spouse. If your spouse died during the year and you file a joint return as a surviving spouse, you are not considered married for purposes of the earned income limit. Use only your income in figuring the earned income limit.
Community property laws. You should disregard community property laws when you figure earned income for this credit.
Student-spouse or spouse not able to care for self. Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more.
Spouse works. If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month.
Spouse qualifies for part of month. If your spouse is a full-time student or not able to care for himself or herself for only part of a month, the full $250 (or $500) still applies for that month.
Both spouses qualify. If, in the same month, both you and your spouse are either full-time students or not able to care for yourselves, only one spouse can be considered to have this earned income of $250 (or $500) for that month.
Dollar Limit
There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.
Tip: If you paid work-related expenses for the care of two or more qualifying persons, the $6,000 limit does not need to be divided equally among them. For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit.
Yearly limit. The dollar limit is a yearly limit. The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. Use the $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Use $6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year.
Reduced Dollar Limit
If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. Your reduced dollar limit is figured in Part III of Form 2441 or Schedule 2 (Form 1040A). See Dependent Care Benefits, earlier, for information on excluding or deducting these benefits.
Example. George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. His employer pays an additional $1,000 under a dependent care benefit plan. This $1,000 is excluded from George's income.
Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. This is because his dollar limit is reduced as shown next.
George's Reduced Dollar Limit
1) Maximum allowable expenses
for one qualifying person $3,000
2) Minus: Dependent care benefits
George excludes from income -1,000
-------
3) Reduced dollar limit on
expenses George can use for
the credit $2,000
=======
Amount of Credit
To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on your adjusted gross income shown on Form 1040, line 38, or Form 1040A, line 22. The following table shows the percentage to use based on adjusted gross income.
IF your adjusted gross THEN
income is: the
But not percentage
Over over is:
$ 0 $15,000 35%
15,000 17,000 34%
17,000 19,000 33%
19,000 21,000 32%
21,000 23,000 31%
23,000 25,000 30%
25,000 27,000 29%
27,000 29,000 28%
29,000 31,000 27%
31,000 33,000 26%
33,000 35,000 25%
35,000 37,000 24%
37,000 39,000 23%
39,000 41,000 22%
41,000 43,000 21%
43,000 No limit 20%
To claim the credit, you can file Form 1040 or Form 1040A. You cannot claim the credit on Form 1040EZ.
Form 1040. You must complete Form 2441 and attach it to your Form 1040. Enter the credit on Form 1040, line 47. An example of a filled-in Form 2441 is at the end of this chapter.
Form 1040A. You must complete Schedule 2 (Form 1040A) and attach it to your Form 1040A. Enter the credit on your Form 1040A, line 29.
Limit on credit. The amount of credit you can claim is limited to your regular tax minus any amount on line 31 of Form 6251. This limit is figured on lines 10 through 13 of Form 2441 or Schedule 2 (Form 1040A). For more information, see the instructions for Form 2441 or Schedule 2 (Form 1040A).
Caution: At the time this publication went to print, Congress was considering legislation that would change this limit. That legislation may also affect the line numbers on Form 2441 and Schedule 2 (Form 1040A). To find out if the legislation was enacted and for more details, see the Instructions for Form 2441.
Tax credit not refundable. You cannot get a refund for any part of the credit that is more than this limit.
Records: Recordkeeping. You should keep records of your work-related expenses. Also, if your dependent or spouse is not able to care for himself or herself, your records should show both the nature and the length of the disability. Other records you should keep to support your claim for the credit are described earlier under Provider Identification Test.
If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. If the individuals who work in your home are self-employed, you are not liable for any of the taxes discussed in this section. Self-employed persons who are in business for themselves are not household employees. Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business.
If you use a placement agency that exercises control over what work is done and how it will be done by a babysitter or companion who works in your home, the worker is not your employee. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you do not have to pay employment taxes. But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee.
If you have a household employee, you may be subject to:
Social security and Medicare taxes are generally withheld from the employee's pay and matched by the employer. Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree.
For more information on a household employer's tax responsibilities, see Publication 926 and Schedule H (Form 1040) and its instructions.
State employment tax. You may also have to pay state unemployment tax. Contact your state unemployment tax office for information. You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance. A list of state employment tax agencies, including addresses and phone numbers, is in Publication 926.
The following example shows how to figure the credit for child and dependent care expenses for two children when employer-provided dependent care benefits are involved. The filled-in draft Form 2441 is shown at the end of this chapter.
Illustrated example. Joan Thomas is divorced and has two children, ages 3 and 9. She works at ACME Computers. Her adjusted gross income (AGI) is $29,000, and the entire amount is earned income.
Joan's younger child (Susan) stays at her employer's on-site childcare center while she works. The benefits from this childcare center qualify to be excluded from her income. Her employer reports the value of this service as $3,000 for the year. This $3,000 is shown on her Form W-2 in box 10, but is not included in taxable wages in box 1.
A neighbor cares for Joan's older child (Seth) after school, on holidays, and during the summer. Joan pays her neighbor $2,400 for this care.
Joan figures her credit on Form 2441 as follows.
1) Work-related expenses Joan
paid $ 2,400
2) Dollar limit (2 or more qualified
individuals) $ 6,000
3) Minus: Dependent care benefits
excluded from Joan's income -3,000
------
4) Reduced dollar limit $ 3,000
======
5) Lesser of expenses paid ($2,400)
or dollar limit ($3,000) $ 2,400
Percentage for AGI of $29,000
6) (28%) .28
------
7) Multiply the amount on line 5 by
the percentage on line 6 ($2,400
× .28) $ 672
8) Enter the amount from Form 1040,
line 44 $ 1,098
9) Enter the amount from Form 6251,
line 31 0
------
10) Subtract line 9 from line 8 $ 1,098
11) Credit (Enter the smaller of line 7
or line 10) $ 672
======
Caution: At the time this publication went to print, Congress was considering legislation that would affect lines 8 through 10 above. To find out if the legislation was enacted, and for more details, see the Instructions for Form 2441.
[The following graphic has not been reproduced:
2007 Thomas' Example Form 2441, Child and Dependent Care Expenses]
If you qualify, the law provides a number of credits that can reduce the tax you owe for a year. One of these credits is the credit for the elderly or the disabled.
This chapter explains the following.
You may be able to take this credit if:
Useful Items
You may want to see:
Publication
Forms (and Instructions)
You can take the credit for the elderly or the disabled if you meet both of the following requirements.
You can use Figure 33-A and Figure 33-B as guides to see if you qualify.
Use Figure 33-A first to see if you are a qualified individual. If you are, go to Figure 33-B to make sure your income is not too high to take the credit.
[The following graphic has not been reproduced:
Figure 33-A. Are You a Qualified Individual?]
Figure 33-B. Income Limits
----------------------------------------------------------------------
THEN even if you qualify (see Figure
33-A), you CANNOT take the credit
if...
----------------------------------------
OR the total of
your nontaxable
social security
and other
Your adjusted gross nontaxable
income (AGI)* is pension(s) is
IF your filing equal to or more equal to or more
status is... than... than...
----------------------------------------------------------------------
single, head of household, or $17,500 $5,000
qualifying widow(er) with
dependent child
----------------------------------------------------------------------
married filing a joint return $25,000 $7,500
and both spouses qualify in
Figure 33-A
----------------------------------------------------------------------
married filing a joint return $20,000 $5,000
and only one spouse qualifies
in Figure 33-A
----------------------------------------------------------------------
married filing a separate $12,500 $3,750
return
----------------------------------------------------------------------
* AGI is the amount on Form 1040A, line 22, or Form 1040, line 38.
======================================================================
Tip: You can take the credit only if you file Form 1040 or Form 1040A. You cannot take the credit if you file Form 1040EZ.
You are a qualified individual for this credit if you are a U.S. citizen or resident alien and either of the following applies.
Age 65. You are considered to be age 65 on the day before your 65th birthday. Therefore, if you were born on January 1, 1943, you are considered to be age 65 at the end of 2007.
U.S. Citizen or Resident Alien
You must be a U.S. citizen or resident alien (or be treated as a resident alien) 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 alien at the end of the tax year and you and your spouse choose to treat you as a U.S. resident alien. If you make that choice, both you and your spouse are taxed on your worldwide incomes.
If you were a nonresident alien at the beginning of the year and a resident alien at the end of the year, and you were married to a U.S. citizen or resident alien at the end of the year, you may be able to choose to be treated as a U.S. resident alien 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 joint 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 the tests. See Head of Household in chapter 2 for the tests you must meet.
Under Age 65
If you are under age 65 at the end of 2007, you can qualify for the credit only if you are retired on permanent and total disability (discussed next) and have taxable disability income (discussed later under Disability income). You are retired on permanent and total disability if:
Even if you do not retire formally, you may be considered retired on disability when you have stopped working because of your disability.
If you retired on disability before 1977, and were not permanently and totally disabled at the time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977.
Tip: You are considered to be under age 65 at the end of 2007 if you were born after January 1, 1943.
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 your 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.
Sheltered employment. Certain work offered at qualified locations to physically or mentally impaired persons is considered sheltered employment. These qualified locations are in sheltered workshops, hospitals, and similar institutions, homebound programs, and Department of Veterans Affairs (VA) sponsored homes.
Compared to commercial employment, pay is lower for sheltered employment. Therefore, one usually does not look for sheltered employment if he or she can get other employment. The fact that one has accepted sheltered employment is not proof of that person's ability to engage in substantial gainful activity.
Physician's statement. If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired. You can use the statement in the instructions for Schedule R (Form 1040) or Schedule 3 (Form 1040A).
You do not have to file this statement with your Form 1040 or Form 1040A, but you must keep it for your records.
Veterans. If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement you are required to keep. VA Form 21-0172 must be signed by a person authorized by the VA to do so. You can get this form from your local VA regional office.
Physician's statement obtained in earlier year. 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 2007, you may not need to get another physician's statement for 2007. For a detailed explanation of the conditions you must meet, see the instructions for Part II of Schedule R (Form 1040) or Schedule 3 (Form 1040A). If you meet the required conditions, check the box on line 2 of Part II of Schedule R (Form 1040) or Schedule 3 (Form 1040A).
If you checked box 4, 5, or 6 in Part I of either Schedule R or Schedule 3, enter in the space above the box on line 2 in 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 must also have taxable disability income to qualify for the credit. Disability income must meet both of the following requirements.
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.
Income Limits
To determine if you can claim the credit, you must consider two income limits. The first limit is the amount of your adjusted gross income (AGI). The second limit is the amount of nontaxable social security and other nontaxable pensions you received. The limits are shown in Figure 33-B, earlier.
If both your AGI and nontaxable pensions are less than the income limits, you may be able to claim the credit. See Figuring the Credit, next.
Caution: If either your AGI or your nontaxable pensions are equal to or more than the income limits, you cannot take the credit.
You can figure the credit yourself (see the explanation that follows) or the IRS will figure it for you. See Credit Figured for You, later.
Figuring the credit yourself. 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.
There are four steps in Part III to determine the amount of your credit:
These steps are discussed in more detail next.
Step 1. Determine Initial Amount
To figure the credit, you must first determine your initial amount. See Table 33-1.
----------------------------------------------------------------------
THEN enter on line 10
of Schedule R (Form 1040) or
IF your filing status is... Schedule 3 (Form 1040A)...
----------------------------------------------------------------------
single, head of household, or
qualifying widow(er) with
dependent child and, by the end
of 2007, you were
• 65 or older $5,000
• under 65 and retired on
permanent and total disability1 $5,000
----------------------------------------------------------------------
married filing a joint return and by
the end of 2007
• both of you were 65 or older $7,500
• both of you were under 65
and one of you retired on permanent
and total disability1 $5,000
• both of you were under 65
and both of you retired on permanent
and total disability2 $7,500
• one of you was 65 or older,
and the other was under 65 and retired
on permanent and total disability3 $7,500
• one of you was 65 or older, and
the other was under 65 and not retired
on permanent and total disability $5,000
----------------------------------------------------------------------
married filing a separate return and
you did not live with your spouse at
any time during the year and, by the
end of 2007, you were
• 65 or older $3,750
• under 65 and retired on permanent
and total disability1 $3,750
----------------------------------------------------------------------
1 Amount cannot be more than the taxable disability income.
2 Amount cannot be more than your combined taxable disability income.
3 Amount is $5,000 plus the taxable disability income of the spouse
under age 65, but not more than $7,500.
======================================================================
Initial amounts for persons under age 65. If you are a qualified individual under age 65, your initial amount cannot be more than your taxable disability income.
Step 2. Total Certain Nontaxable Pensions and Benefits
Step 2 is to figure the total amount of nontaxable social security and certain other nontaxable payments you received during the year.
Enter these nontaxable payments on lines 13a or 13b, and total them on line 13c. If you are married filing a joint return, you must enter the combined amount of nontaxable payments both you and your spouse receive.
Tip: Worksheets are provided in the instructions for Forms 1040 and 1040A to help you determine if any of your social security benefits (or equivalent railroad retirement benefits) are taxable.
Nontaxable payments. Include the following nontaxable payments in the amounts you enter on lines 13a and 13b.
Caution: You should be sure to take into account all of the nontaxable amounts you receive. These amounts are verified by the IRS through information supplied by other government agencies.
Step 3. Determine Excess Adjusted Gross Income
You also must reduce your initial amount by your excess adjusted gross income. Figure your excess adjusted gross income on lines 14-17.
You figure your excess adjusted gross income as follows:
Step 4. Determine Your Credit
To determine if you can take the credit, you must add the amounts you figured in Step 2 and Step 3.
------------------------------------------ IF the total of Steps 2 and 3 is... THEN... ------------------------------------------ equal to or more you cannot take the than the amount in credit. Step 1 ------------------------------------------ less than the you can take the amount in Step 1 credit. ------------------------------------------
Figuring the credit. If you can take the credit, subtract the total of Step 2 and Step 3 from the amount in Step 1 and multiply the result by 15%.
In certain cases, the amount of your credit may be limited. See Limit on credit, later.
Example. You are 66 years old and your spouse is 64. Your spouse is not disabled. You file a joint return on Form 1040. Your adjusted gross income is $14,630. Together you received $3,200 from social security, which was nontaxable. You figure the credit as follows:
1) Initial amount $5,000
2) Subtract from line 1 the total
of:
a. Nontaxable social security
and other nontaxable
pensions $3,200
b. Excess adjusted gross
income
($14,630 - $10,000) ÷ 2 2,315 5,515
------ ------
3) Balance (Not less than -0-) -0-
======
4) Credit -0-
======
You cannot take the credit because your nontaxable social security (line 2a) plus your excess adjusted gross income (line 2b) is more than your initial amount (line 1).
Limit on credit. The amount of credit you can claim is generally limited to the amount of your tax. For more information, see the instructions for Part III, Schedule R (Form 1040) or Schedule 3 (Form 1040A).
Caution: At the time this publication went to print, Congress was considering legislation that would affect this limit. To find out if the legislation was enacted, and for more details, see the Instructions for Schedule R (Form 1040).
Credit Figured for You
If you choose to have the Internal Revenue Service (IRS) figure the credit for you, read the following discussion for the form you will file (Form 1040 or 1040A). If you want the IRS to figure your tax, see chapter 30.
Form 1040. If you want the IRS to figure your credit, see Form 1040 Line Entries under Tax Figured by IRS in chapter 30.
Form 1040A. If you want the IRS to figure your credit, see Form 1040A Line Entries under Tax Figured by IRS in chapter 30.
Example
The following example illustrates the credit for the elderly or the disabled. The initial amount is taken from Table 33-1, shown earlier.
James Davis is 58 years old, single, and files Form 1040A. In 1998 he retired on permanent and total disability, and he is still permanently and totally disabled. He got the required physician's statement in 1998, and kept it with his records. His physician signed on line B of the statement. This year James checks the box in Part II of Schedule 3. He does not need to get another statement for 2007.
He received the following income for the year:
Nontaxable social security $1,500 Interest (taxable) 100 Taxable disability pension 11,400
James' adjusted gross income is $11,500 ($11,400 + $100). He figures the credit on Schedule 3 as follows:
1) Initial amount $5,000
2) Taxable disability pension 11,400
3) Smaller of (1) or (2) 5,000
------
4) Subtract from line 3 the
total of:
a. Nontaxable social
security benefits $1,500
b. Excess adjusted gross
income
($11,500 - $7,500) ÷ 2 2,000 3,500
------ ------
5) Balance (not less than -0-) 1,500
======
6) Multiply line 5 by 15% (.15) 225
------
7) Enter the amount from
Form 1040A, line 28 276
------
8) Enter any amounts from
Form 1040A, line 29 -0-
------
9) Subtract line 8 from line 7 276
------
10) Credit
(Enter the smaller of line 6
or line 9) $225
======
His credit is $225. He enters $225 on line 30 of Form 1040A. The Schedule 3 for James Davis is not shown.
The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children.
The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit.
This chapter explains the following.
Caution: The child tax credit and the additional child tax credit should not be confused with the child and dependent care credit discussed in chapter 32.
If you have no tax. Credits, such as the child tax credit, the adoption credit, or the credit for child and dependent care expenses, are used to reduce tax. If your tax on Form 1040, line 46, or Form 1040A, line 28, is zero, do not figure the child tax credit because there is no tax to reduce. However, you may qualify for the additional child tax credit on line 68 (Form 1040) or line 41 (Form 1040A).
Useful Items
You may want to see:
Publication
Form (and Instructions)
A qualifying child for purposes of the child tax credit is a child who:
For each qualifying child you must either check the box on Form 1040 or Form 1040A, line 6c, column (4), or complete Form 8901 (if the child is not your dependent).
Example. Your son turned 17 on December 30, 2007. He is a citizen of the United States and you claimed him as a dependent on your return. He is not a qualifying child for the child tax credit because he was not under age 17 at the end of 2007.
Exceptions to time lived with you. A child is considered to have lived with you for all of 2007 if the child was born or died in 2007 and your home was this child's home for the entire time he or she was alive. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, or detention in a juvenile facility, count as time lived at home.
There are also exceptions for kidnapped children and children of divorced or separated parents. For details, see Residency Test, in chapter 3.
Qualifying child of more than one person. A special rule applies if your qualifying child is the qualifying child of more than one person. For details, see Special Test for Qualifying Child of More Than One Person, in chapter 3.
Adopted child. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
If you are a U.S. citizen or U.S. national and your adopted child lived with you as a member of your household all year, that child meets condition (5) above to be a qualifying child for the child tax credit.
The maximum amount you can claim for the credit is $1,000 for each qualifying child.
Limits on the Credit
You must reduce your child tax credit if either (1) or (2) applies.
Modified AGI. For purposes of the child tax credit, your modified AGI is your AGI plus the following amounts that may apply to you.
If you do not have any of the above, your modified AGI is the same as your AGI.
AGI. Your AGI is the amount on Form 1040, line 38, or Form 1040A, line 22.
To claim the child tax credit, you must file Form 1040 or Form 1040A. You cannot claim the child tax credit on Form 1040EZ. You must provide the name and identification number (usually a social security number) on your tax return (or Form 8901) for each qualifying child.
Answer the Questions in your form instructions for Form 1040, line 52, or Form 1040A, line 32, to find out which child tax credit worksheet you can use to figure the credit.
If you answer "Yes" to question 1, 2, or 3 in your Form 1040 instructions or question 1 or 2 in your Form 1040A instructions, you must complete the child tax credit worksheet in Publication 972. Otherwise, you can use the Child Tax Credit Worksheet in your Form 1040 or Form 1040A instructions. (See the filled-in example, later.)
This credit is for certain individuals who get less than the full amount of the child tax credit. The additional child tax credit may give you a refund even if you do not owe any tax.
How to claim the additional child tax credit. To claim the additional child tax credit, follow the steps below.
The child tax credit decreases your tax. You can check your tax withholding by using Publication 919, How Do I Adjust My Tax Withholding.
If you are having too much tax withheld, and you prefer to have the money during the year, you may be able to decrease your withholding. You do this by completing a new Form W-4 and giving it to your employer.
Amy Brown files as head of household and has two dependent children under age 17. The children are qualifying children for purposes of the child tax credit. Amy's only income is her salary of $30,350. Amy chooses to itemize her deductions and files Form 1040. Her AGI, shown on line 38 of her Form 1040, is $30,350. This is her taxable earned income.
Amy does not file Form 2555, 2555-EZ, or 4563. She does not exclude income from Puerto Rico. Her modified AGI is $30,350.
Amy's tax, shown on line 46 of her Form 1040, is $1,334. She claims a $225 credit for child and dependent care expenses on line 47. She claims a $1,029 earned income credit on line 66a. She has no other credits.
After answering the Questions in the Form 1040 instructions for line 52, she completes the child tax credit worksheet to figure her child tax credit of $1,109. Amy's completed questions and child tax credit worksheet are shown later.
Amy reads the Tip in the worksheet and finds that she may be able to take the additional child tax credit. See Additional Child Tax Credit and Amy's completed Form 8812, later.
Filled-in Questions for Amy Brown (Page references are to the Form 1040 instructions.)
--------------------------------------------------------------
Questions: Who Must Use
Pub. 972
1. Is the amount on Form 1040, line 38, more than the amount
shown below for your filing status?
• Married filing jointly - $110,000
• Single, head of household, or qualifying widow(er) -
$75,000
• Married filing separately - $55,000
[] Yes. STOP [x] No. Go to question 2.
You must use Pub. 972 to
figure your credit.
-----------------------------------------------------------
2. Are you claiming any of the following credits?
• Residential energy credits, Form 5695.
• Retirement savings contributions credit, Form 8880.
• Mortgage interest credit, Form 8396.
• District of Columbia first-time homebuyer credit,
Form 8859.
• Adoption credit, Form 8839.
[] Yes. STOP [x] No. Continue
You must use
Pub. 972 to figure your
child tax credit. You will
also need the form(s)
listed above for any
credit(s) you are claiming.
-----------------------------------------------------------
3. Are you excluding income from Puerto Rico or are you
filing any of the following forms?
• Form 2555 or 2555-EZ (relating to foreign earned
income).
• Form 4563 (exclusion of income for residents of
American Samoa).
[] Yes. STOP [x] No. Use the
You must use Pub. 972 to worksheet on
figure your credit. page 40 to figure
your credit.
--------------------------------------------------------------
Child Tax Credit Worksheet--Line 52
Keep for Your Records
----------------------------------------------------------------------
Caution: • To be a qualifying child for the child tax credit, the
child must be under age 17 at the end of 2007 and meet
the other requirements listed on page 15.
• Do not use this worksheet if you answered "Yes" to
question 1, 2, or 3 on page 39. Instead, use Pub. 972.
----------------------------------------------------------------------
1. Number of qualifying
children: 2 × $1,000. 1 2,000
Enter the result.
-----------------------------------------------------
2. Enter the amount from Form 1040, line 46. 2 1,334
-------------------------------------------
3. Add the amounts from Form 1040:
Line 47 225
Line 48 + __________
Line 49 + __________
Line 51 + __________ Enter the total. 3 225
-------------------------------------------
4. Are the amounts on lines 2 and 3 the same?
[ ] Yes. STOP
You cannot take this credit because
there is no tax to reduce. However, you
may be able to take the additional
child tax credit. See the Tip below.
[x] No. Subtract line 3 from line 2. 4 1,109
-----------------------------------------------------
5. Is the amount on line 1 more than the amount
on line 4?
[x] Yes. Enter the amount from }
line 4. Also, you may be }
able to take the } This is your child 5 1,109
additional child tax } tax credit.
credit. See the Tip below. } Enter this
} amount on
} Form 1040,
} line 52.
[ ] No. Enter the amount from }
line 1. }
-----------------------------------------------------
Tip: You may be able to take the additional child tax
credit on Form 1040, line 68, if you answered
"Yes" on line 4 or line 5 above.
• First, complete your Form 1040 through line 67.
• Then, use Form 8812 to figure any additional
child tax credit.
----------------------------------------------------------------------
[The following graphic has not been reproduced:
2007 Browns' Example Form 8812, Additional Child Tax Credit]
Income limits increased. Beginning in 2007, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim a credit if your MAGI is $57,000 or more ($114,000 or more if you file a joint return). This is an increase from the 2006 limits of $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return). For more information, see Effect of the Amount of Your Income on the Amount of Your Credit, later.
This chapter discusses two tax credits (referred to here as education credits) available to persons who pay expenses for higher education. They are:
The chapter will do the following.
Can you claim both education credits this year. For each student, you can elect for any year only one of the credits. For example, if you elect to take the Hope credit for a child on your 2007 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2007.
If you are eligible to claim the Hope credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. For 2007, if the total qualified education expenses for a student are less than $8,250, it will generally be to your benefit to claim the Hope credit.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope credit for one student and the lifetime learning credit for another student in the same year.
Differences between the Hope and lifetime learning credits. There are several differences between these two credits. For example, you can claim the Hope credit based on the same student's expenses for no more than 2 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between the two credits are summarized in Table 35-1, above.
Table 35-1. Comparison of Education Credits
--------------------------------------------------------------------- Hope Credit Lifetime Learning Credit --------------------------------------------------------------------- Up to $1,650 credit per eligible Up to $2,000 credit per return student --------------------------------------------------------------------- Available ONLY until the Available for all years of first 2 years of postsecondary education and for postsecondary education are courses to acquire or completed improve job skills --------------------------------------------------------------------- Available ONLY for 2 years per Available for an unlimited eligible student number of years --------------------------------------------------------------------- Student must be pursuing an Student does not need to be undergraduate degree or other pursuing a degree or other recognized educational credential recognized education credential --------------------------------------------------------------------- Student must be enrolled at Available for one or more courses least half time for at least one academic period beginning during the year --------------------------------------------------------------------- No felony drug conviction on Felony drug conviction rule does student's record not apply ---------------------------------------------------------------------
Useful Items
You may want to see:
Publication
Form (and Instructions)
Several rules are common to both education credits. These are discussed below.
The following rules will help you determine if you are eligible to claim an education credit on your tax return.
Who Can Claim a Credit
Generally, you can claim an education credit if all three of the following requirements are met.
Note. Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.
"Qualified education expenses" are defined later under What Expenses Qualify. A "dependent for whom you claim an exemption" is defined later under Who Can Claim a Dependent's Expenses. "Eligible students" are defined differently for each credit. See Who Is an Eligible Student under the specific information for either the Hope or lifetime learning credit.
You may find Figure 35-A, on the next page, helpful in determining if you can claim an education credit on your tax return.
[The following graphic has not been reproduced:
Figure 35-A. Can You Claim an Education Credit for 2007?]
Who Cannot Claim a Credit
You cannot claim an education credit for 2007 if any of the following apply.
The education credits are based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, a credit is allowed for qualified education expenses paid in 2007 for an academic period beginning in 2007 or in the first 3 months of 2008.
For example, if you paid $1,500 in December 2007 for qualified tuition for the Spring 2008 semester beginning in January 2008, you may be able to use that $1,500 in figuring your 2007 credit.
Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
Paid with borrowed funds. You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the education credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.
Student withdraws from class(es). You can claim an education credit for qualified education expenses not refunded when a student withdraws.
Qualified Education Expenses
For purposes of an education credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
In the following examples, assume that each student is an eligible student at an eligible educational institution.
Example 1. Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense.
Example 2. Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.
Example 3. When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.
No Double Benefit Allowed
You cannot do any of the following.
Adjustments to Qualified Education Expenses
If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.
Tax-free educational assistance. This includes:
Refunds. Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. For more information, see Refunds in chapters 2 and 3 of Publication 970.
Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:
Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.
Example 1. Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan.
The terms of the scholarship state that it may be used to pay any of Jackie's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring an education credit (either Hope or lifetime learning), she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition -- $2,000 scholarship).
Example 2. The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds and can figure her education credit on the entire $3,000.
Expenses That Do Not Qualify
Qualified education expenses do not include amounts paid for:
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.
Sports, games, hobbies, and noncredit courses. Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.
Comprehensive or bundled fees. Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit, later, for more information about Form 1098-T.
Who Can Claim a Dependent's Expenses
If there are qualified education expenses for your dependent for a year, either you or your dependent, but not both of you, can claim an education credit for your dependent's expenses for that year.
For you to claim an education credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.
--------------------------------------------
IF you... THEN only...
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claim an exemption you can claim an
on your tax return education credit
for a dependent who based on that
is an eligible student dependent's
expenses. The
dependent cannot
claim a credit.
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do not claim an the dependent can
exemption on your claim an education
tax return for a credit. You cannot
dependent who is an claim a credit based
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(even if entitled to expenses.
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--------------------------------------------
Expenses paid by dependent. If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your education credit.
Tip: Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.
Expenses paid by you. If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of an education credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring an education credit.
Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.
Example. In 2007, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an education credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying his qualified education expenses himself.
Unless an exemption for Todd is claimed on someone else's 2007 tax return, only Todd can use the payment to claim an education credit.
If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2007 tax return, whoever claims the exemption may be able to use the expenses to claim an education credit. If anyone else claims an exemption for Todd, Todd cannot claim an education credit.
Tuition reduction. When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1 of Publication 970.
Effect of the Amount of Your Income on the Amount of Your Credit
The amount of your education credit is phased out (gradually reduced) if your MAGI is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim an education credit if your MAGI is $57,000 or more ($114,000 or more if you file a joint return).
Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
MAGI when using Form 1040A. If you file Form 1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:
Phaseout. If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 7 -- 13 of Form 8863.
When Must the Credit Be Repaid (Recaptured)
If, after you file your 2007 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure an education credit on that return, you may have to repay all or part of the credit. You must refigure your education credit(s) for 2007 as if the assistance or refund was received in 2007. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund. See the instructions for your tax return for that year to find out how to report the recapture amount. Your original 2007 tax return does not change.
For the tax year, you may be able to claim a Hope credit of up to $1,650 for qualified education expenses paid for each eligible student.
Who Is an Eligible Student
To claim the Hope credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements.
Completion of first 2 years. A student who was awarded 2 years of academic credit for postsecondary work completed before 2007 has completed the first 2 years of postsecondary education. This student generally would not be an eligible student for purposes of the Hope credit.
Exception. Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 2 years of postsecondary education.
Enrolled at least half-time. A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the Department of Education under the Higher Education Act of 1965.
Example 1. Marty graduated from high school in June 2006. In September, he enrolled in an undergraduate degree program at College U, and attended full time for both the 2006 Fall and 2007 Spring semesters. For the 2007 Fall semester, Marty was enrolled less than half-time. Because Marty was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2006 and at least one academic period that began during 2007, he is an eligible student for tax years 2006 and 2007 (including the 2007 Fall semester when he enrolled at College U on less than a half-time basis).
Example 2. After taking classes at College V on a half-time basis for the 2006 Spring and Fall semesters, Sharon became a full-time student for the 2007 Spring semester. College V classified Sharon as a second-semester sophomore for the 2007 Spring semester and as a first-semester junior for the 2007 Fall semester. Because College V did not classify Sharon as having completed the first two years of postsecondary education as of the beginning of 2007, Sharon is an eligible student for tax year 2007. Therefore, the qualified education expenses paid for the 2007 Spring semester and the 2007 Fall semester are taken into account in calculating any Hope credit for 2007.
Example 3. During the 2006 Fall semester, Luis was a high school student who took classes on a half-time basis at College X. Luis was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Because Luis was not enrolled in a degree program at College X during 2006, Luis was not an eligible student for tax year 2006.
Example 4. The facts are the same as in Example 3. During the 2007 Spring semester, Luis again attended College X but not as part of a degree program. Luis graduated from high school in June 2007. For the 2007 Fall semester, Luis enrolled as a full-time student in College X as part of a degree program, and College X awarded Luis credit for his prior coursework at College X. Because Luis was enrolled in a degree program at College X for the 2007 Fall term on at least a half-time basis, Luis is an eligible student for all of tax year 2007. Therefore, the qualified education expenses paid for classes taken at College X during both the 2007 Spring semester (during which Luis was not enrolled in a degree program) and the 2007 Fall semester are taken into account in computing any Hope credit.
Example 5. Diana graduated from high school in June 2005. In January 2006, Diana enrolled in a one-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Diana completed the program in December 2006, and was awarded a certificate. In January 2007, she enrolled in a one-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Diana is an eligible student for both tax years 2006 and 2007 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years.
Figuring the Credit
The amount of the Hope credit (per eligible student) is the sum of:
The maximum amount of Hope credit you can claim in 2007 is $1,650 times the number of eligible students. You can claim the full $1,650 for each eligible student for whom you paid at least $2,200 of qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit, earlier.
Example. Jon and Karen Frost are married and file a joint tax return. For 2007, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her sophomore (second) year of studies at the local university. Jon and Karen paid qualified education expenses of $4,300 in 2007.
Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can claim a $1,650 Hope credit in 2007. This is 100% of the first $1,100 of qualified education expenses, plus 50% of the next $1,100.
Form 1098-T. To help you figure your Hope credit, you should receive Form 1098-T. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2008.
Claiming the Credit
You claim the Hope credit by completing Parts I and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 49, or on Form 1040A, line 31.
For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student.
Who Is an Eligible Student
For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses, earlier.
Figuring the Credit
The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2007 is $2,000 (20% × $10,000). However, that amount may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit, earlier.
Example. Bruce and Toni are married and file a joint tax return. For 2007, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2007, Toni paid $6,000 of qualified education expenses for her Fall 2007 semester. Bruce and Toni can claim a $1,200 (20% × $6,000) lifetime learning credit on their 2007 joint tax return.
Form 1098-T. To help you figure your lifetime learning credit, you should receive Form 1098-T. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2008.
Claiming the Credit
You claim the lifetime learning credit by completing Parts II and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 49, or Form 1040A, line 31.
Earned income amount is more. The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if:
Your adjusted gross income also must be less than the amount in the above list that applies to you. For details, see Rules 1 and 15.
Investment income amount is more. The maximum amount of investment income you can have and still get the credit has increased to $2,900. See Rule 6.
Increased EIC on certain joint returns. A married person filing a joint return may get more EIC than someone with the same income but a different filing status. As a result, the EIC table has different columns for married persons filing jointly than for everyone else. When you look up your EIC in the EIC Table, be sure to use the correct column for your filing status and the number of children you have.
Advance payment of the earned income credit in your paycheck. If you expect to qualify for the earned income credit in 2008, you can receive part of it in each paycheck throughout the year. See Advance Earned Income Credit, later, for more information.
Online help. You can use the EITC Assistant at www.irs.gov/eitc to find out if you are eligible for the credit. The EITC Assistant is available in English and Spanish.
EIC questioned by IRS. The IRS may ask you to provide documents to prove you are entitled to claim the EIC. We will tell you what documents to send us. These may include: birth certificates, school records, medical records, etc. We will also send you a letter with the name, address, and telephone number of the IRS employee assigned to your case. The process of establishing your eligibility will delay your refund
The earned income credit (EIC) is a tax credit for certain people who work and have less than $39,783 of earned income. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EIC may also give you a refund.
How do you get the earned income credit? To claim the EIC, you must:
When you complete your return, you can figure your EIC by using a worksheet in the instructions for Form 1040, Form 1040A, or Form 1040EZ. Or, if you prefer, you can let the IRS figure the credit for you.
How will this chapter help you? This chapter will explain the following.
Useful Items
You may want to see:
Publication
Form (and Instructions)
To qualify to claim the EIC, you must first meet all of the rules explained in Part A, Rules for Everyone. Then you must meet the rules in Part B, Rules If You Have a Qualifying Child, or Part C, Rules If You Do Not Have a Qualifying Child. There is one final rule you must meet in Part D, Figuring and Claiming the EIC. You qualify for the credit if you meet all the rules in each part that applies to you.
Table 36-1, Earned Income Credit in a Nutshell. Use Table 36-1 as a guide to Parts A, B, C, and D. The table is a summary of all the rules in each part.
Table 36-1. Earned Income Credit in a Nutshell
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First, you must meet all the rules in this column.
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Part A.
Rules for Everyone
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1. Your adjusted gross 2. You must have a valid
income (AGI) must be social security number.
less than: 3. Your filing status
• $37,783 ($39,783 for cannot be "Married filing
married filing jointly) if separately."
you have more than one 4. You must be a U.S.
qualifying child, citizen or resident alien
all year.
• $33,241 ($35,241 for 5. You cannot file
married filing jointly) if Form 2555 or Form 2555-EZ
you have one qualifying (relating to foreign
child, or earned income).
6. Your investment
• $12,590 ($14,590 for income must be $2,900
married filing jointly) if or less.
you do not have a 7. You must have
qualifying child. earned income.
------------------------------------------------------
[Table Continued]
------------------------------------------------------
Second, you must meet all the rules in one of
these columns, whichever applies.
------------------------------------------------------
Part B. Part C.
Rules If You Have a Rules If You Do Not
Qualifying Child Have a Qualifying
Child
------------------------------------------------------
8. Your child must meet 11. You must be at
the relationship, age, and least age 25 but under
residency tests. age 65.
9. Your qualifying child 12. You cannot be the
cannot be used by more dependent of another
than one person to claim person.
the EIC. 13. You cannot be a
10. You cannot be a qualifying child of
qualifying child of another another person.
person. 14. You must have
lived in the United
States more than half
of the year.
------------------------------------------------------
[Table Continued]
---------------------------------
Third, you must meet the
rule in this column.
---------------------------------
Part D.
Figuring and Claiming the
EIC
---------------------------------
15. Your earned income must
be less than:
• $37,783 ($39,783 for
married filing jointly) if you
have more than one
qualifying child,
• $33,241 ($35,241 for
married filing jointly) if you
have one qualifying child, or
• $12,590 ($14,590 for
married filing jointly) if you do
not have a qualifying child.
---------------------------------
Do you have a qualifying child? You have a qualifying child only if you have a child who meets the three tests described in Rule 8 and illustrated in Figure 36-1.
If Improper Claim Made in Prior Year
If your EIC for any year after 1996 was denied or reduced for any reason other than a math or clerical error, you must attach a completed Form 8862 to your next tax return to claim the EIC. You must also qualify to claim the EIC by meeting all the rules described in this chapter.
However, if your EIC was denied or reduced as a result of a math 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 math or clerical errors.
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.
More information. See chapter 5 in Publication 596 for more detailed information about the disallowance period and Form 8862.
This part of the chapter discusses Rules 1 through 7. You must meet all seven rules to qualify for the earned income credit. If you do not meet all seven rules, you cannot get the credit and you do not need to read the rest of the chapter.
If you meet all seven rules in this part, then read either Part B or Part C (whichever applies) for more rules you must meet.
Rule 1. Your AGI Must Be Less Than:
Adjusted gross income (AGI). AGI is the amount on line 38 (Form 1040), line 22 (Form 1040A), or line 4 (Form 1040EZ). If your AGI is equal to or more than the applicable limit listed above, you cannot claim the EIC.
Example. Your AGI is $34,500, you are single, and you have one qualifying child. You cannot claim the EIC because your AGI is not less than $33,241. However, if your filing status was married filing jointly, you might be able to claim the EIC because your AGI is less than $35,241.
Community property. If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your AGI includes that portion of both your and your spouse's wages that you are required to include in gross income. This is different from the community property rules that apply under Rule 7.
Rule 2. You Must Have a Valid Social Security Number (SSN)
To claim the EIC, you (and your spouse if filing a joint return) must have a valid SSN issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC also must have a valid SSN. (See Rule 8 if you have a qualifying child.)
If your social security card (or your spouse's if filing a joint return) says "Not valid for employment" and your SSN was issued so that you (or your spouse) could get a federally funded benefit, you cannot get the EIC. An example of a federally funded benefit is Medicaid.
If you have a card with the legend "Not valid for employment" and your immigration status has changed so that you are now a U.S. citizen or permanent resident, ask the SSA for a new social security card without the legend.
U. S. citizen. If you were a U. S. citizen when you received your SSN, you have a valid SSN.
Valid for work only with INS or DHS authorization. If your social security card reads "Valid for work only with INS authorization," or "Valid for work only with DHS authorization," you have a valid SSN.
SSN missing or incorrect. If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC.
Other taxpayer identification number. You cannot get the EIC if, instead of an SSN, you (or your spouse if filing a joint return) have an individual taxpayer identification number (ITIN). ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN.
No SSN. If you do not have a valid SSN, put "No" next to line 66a (Form 1040), line 40a (Form 1040A), or line 8a (Form 1040EZ). You cannot claim the EIC.
Getting an SSN. If you (or your spouse if filing a joint return) do not have an SSN, you can apply for one by filing Form SS-5, Application for a Social Security Card, with the Social Security Administration.
Filing deadline approaching and still no SSN. If the filing deadline is approaching and you still do not have an SSN, you have two choices.
Rule 3. Your Filing Status Cannot Be Married Filing Separately
If you are married, you usually must file a joint return to claim the EIC. Your filing status cannot be "Married filing separately."
Spouse did not live with you. If you are married and your spouse did not live in your home at any time during the last 6 months of the year, you may be able to file as head of household, instead of married filing separately. In that case, you may be able to claim the EIC. For detailed information about filing as head of household, see chapter 2.
Rule 4. You Must Be a U.S. Citizen or Resident Alien All Year
If you (or your spouse, if married) were a nonresident alien for any part of the year, you cannot claim the earned income credit unless your filing status is married filing jointly. You can use that filing status only if one spouse is a U.S. citizen or resident alien and you choose to treat the nonresident spouse as a U.S. resident. If you make this choice, you and your spouse are taxed on your worldwide income. If you (or your spouse, if married) were a nonresident alien for any part of the year and your filing status is not married filing jointly, enter "No" on the dotted line next to line 66a (Form 1040) or in the space to the left of line 40a (Form 1040A). If you need more information on making this choice, get Publication 519, U.S. Tax Guide for Aliens.
Rule 5. You Cannot File Form 2555 or Form 2555-EZ
You cannot claim the earned income credit if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. U.S. possessions are not foreign countries. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more detailed information.
Rule 6. Your Investment Income Must Be $2,900 or Less
You cannot claim the earned income credit unless your investment income is $2,900 or less. If your investment income is more than $2,900, you cannot claim the credit. For most people, investment income is the total of the following amounts.
If you file Form 1040EZ, your investment income is the total of the amount of line 2 and the amount of any tax-exempt interest you wrote to the right of the words "Form 1040EZ" on line 2.
However, if you are reporting income or loss from the rental of personal property on Form 1040, line 21, or are filing Schedule E (Form 1040), Form 8814, or Form 4797, see Rule 6 in chapter 1 of Publication 596 for more information.
Rule 7. You Must Have Earned Income
This credit is called the "earned income" credit because, to qualify, you must work and have earned income. If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. If you are an employee, earned income includes all the taxable income you get from your employer. If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the instructions for Form 1040.
Earned Income
Earned income includes all of the following types of income.
Wages, salaries, and tips. Wages, salaries, and tips you receive for working are reported to you on Form W-2, box 1. You should report these on line 1 (Form 1040EZ) or line 7 (Forms 1040A and 1040).
Nontaxable combat pay election. You can elect to include your nontaxable combat pay in earned income for the earned income credit. 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. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q.
Self-employed persons and statutory employees. If you are self-employed or received income as a statutory employee, you must use the Form 1040 instructions to see if you qualify to get the EIC.
Approved Form 4361 or Form 4029
This section is for persons who have an approved:
Each approved form exempts certain income from social security taxes. Each form is discussed in this section in terms of what is or is not earned income for purposes of the EIC.
Form 4361. Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. Amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches.
Form 4029. Even if you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation count as earned income. However, amounts you received as a self-employed individual do not count as earned income. Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040.
Disability Benefits
If you retired on disability, benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Report taxable pension payments on Form 1040, lines 16a and 16b (or Form 1040A, lines 12a and 12b).
Disability insurance payments. Payments you received from a disability insurance policy that you paid the premiums for are not earned income. It does not matter whether you have reached minimum retirement age. If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code "J."
Income That Is Not Earned Income
Examples of items that are not earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. Do not include any of these items in your earned income.
Earnings while an inmate. Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. This includes amounts for work performed while in a work release program or while in a halfway house.
Workfare payments. Nontaxable workfare payments are not earned income for the EIC. These are cash payments certain people receive from a state or local agency that administers public assistance programs funded under the federal Temporary Assistance for Needy Families (TANF) program in return for certain work activities such as (1) work experience activities (including remodeling or repairing public housing) if sufficient private sector employment is not available, or (2) community service program activities.
Community property. If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your earned income for the EIC does not include any amount earned by your spouse that is treated as belonging to you under those laws. That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your state's community property laws.
Nontaxable military pay. Nontaxable pay for members of the Armed Forces is not considered earned income for the EIC. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). See Publication 3, Armed Forces' Tax Guide, for more information.
Tip: Combat pay. You can elect to have your nontaxable combat pay considered earned income for the EIC. See Nontaxable combat pay election, earlier.
If you have met all of the rules in Part A, read Part B to see if you have a qualifying child.
Part B discusses Rules 8 through 10. You must meet all three of these rules, in addition to the rules in Parts A and D, to qualify for the earned income credit with a qualifying child.
You must file Form 1040 or Form 1040A to claim the EIC with a qualifying child. (You cannot file Form 1040EZ.) You also must complete Schedule EIC and attach it to your return. If you meet all the rules in Part A and this part, read Part D to find out what to do next.
Caution: If you do not meet Rule 8, you do not have a qualifying child. Read Part C to find out if you can get the earned income credit without a qualifying child.
Rule 8. Your Child Must Meet the Relationship, Age, and Residency Tests
Your child is a qualifying child if your child meets three tests. The three tests are:
The three tests are illustrated in Figure 36-1. The paragraphs that follow contain more information about each test.
Figure 36-1. Tests for Qualifying Child
----------------------------------------------------------------------
Relationship
A qualifying child is a child who is your...
Son, daughter, stepchild, foster child, or a
descendant of any of them (for example,
your grandchild)
OR
Brother, sister, half brother, half sister,
stepbrother, stepsister, or a descendant of
any of them (for example, your niece or nephew)
----------------------------------------------------------------------
Age AND
was...
Under age 19 at the end of 2007
OR
Under age 24 at the end of 2007 and
a student
OR
Permanently and totally disabled at any
time during the year, regardless of age.
----------------------------------------------------------------------
AND
Residency
who...
Lived with you in the United States
for more than half of 2007.
----------------------------------------------------------------------
Relationship Test
To be your qualifying child, a child must be your:
The following definitions clarify the relationship test.
Adopted child. An adopted child is always treated as your own child. The term "adopted child" includes a child who was lawfully placed with you for legal adoption.
Foster child. For the EIC, a person is your foster child if the child is placed with you by an authorized placement agency or by judgement, decree, or other order of any court of competent jurisdiction. An authorized placement agency includes a state or local government agency. It also includes a tax-exempt organization licensed by a state. In addition, it includes an Indian tribal government or an organization authorized by an Indian tribal government to place Indian children.
Example. Debbie, who is 12 years old, was placed in your care 2 years ago by an authorized agency responsible for placing children in foster homes. Debbie is your foster child.
Married child. If your child was married at the end of the year, he or she does not meet the relationship test unless either of these two situations applies to you:
Age Test
Your child must be:
The following example and definitions clarify the age test.
Example. Your son turned 19 on December 10. Unless he was disabled or a student, he is not a qualifying child because, at the end of the year, he was not under age 19.
Student defined. To qualify as a student, your child must be, during some part of each of any 5 calendar months during the calendar year:
The 5 calendar months need not be consecutive.
A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.
School defined. A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. However, on-the-job training courses, correspondence schools, and schools offering courses only through the Internet do not count as schools for the EIC.
Vocational high school students. Students who work in co-op jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students.
Permanently and totally disabled. Your child is permanently and totally disabled if both of the following apply.
Residency Test
Your child must have lived with you in the United States for more than half of 2007. The following definitions clarify the residency test.
United States. This means the 50 states and the District of Columbia. It does not include Puerto Rico or U.S. possessions such as Guam.
Homeless shelter. Your home can be any location where you regularly live. You do not need a traditional home. For example, if your child lived with you for more than half the year in one or more homeless shelters, your child meets the residency test.
Military personnel stationed outside the United States. U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC.
Extended active duty. Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days.
Birth or death of a child. A child who was born or died in 2007 is treated as having lived with you for all of 2007 if your home was the child's home the entire time he or she was alive in 2007.
Temporary absences. Count time that you or your child is away from home on a temporary absence due to a special circumstance as time lived with you. Examples of a special circumstance include illness, school attendance, business, vacation, military service, and detention in a juvenile facility.
Kidnapped child. A kidnapped child is treated as living with you for more than half of the year if the child lived with you for more than half the part of the year before the date of the kidnapping. The child must be presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or your child's family. This treatment applies for all years until the child is returned. However, the last year this treatment can apply is the earlier of:
If your qualifying child has been kidnapped and meets these requirements, enter "KC," instead of a number, on line 6 of Schedule EIC.
Social security number. Your qualifying child must have a valid social security number (SSN) unless the child was born and died in 2007. You cannot claim the EIC on the basis of a qualifying child if:
If you have two qualifying children and only one has a valid SSN, you can claim the EIC only on the basis of that child. For more information about SSNs, see Rule 2.
Rule 9. Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC
Sometimes a child meets the rules to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child and claim the EIC using that child. The paragraphs that follow will help you decide who, if anyone, can claim the EIC when more than one person has the same qualifying child.
You can choose which person will claim the EIC. If you and someone else have the same qualifying child, you and the other person(s) can decide which of you, if otherwise eligible, will take all of the following tax benefits based on the qualifying child.
The other person cannot take any of these six tax benefits unless he or she has a different qualifying child.
If you and the other person(s) cannot agree and more than one person claims the EIC or the other tax benefits just listed using the same child, the tie-breaker rule (explained in Table 36-2) applies. However, the tie-breaker rule does not apply if the other person is your spouse and you file a joint return.
If another person claims the EIC using this child. If your EIC is denied because your qualifying child is treated under this rule as the qualifying child of another person for 2007, you may be able to take the EIC using a different qualifying child, but you cannot take the EIC using the rules in Part C for people who do not have a qualifying child.
If the other person cannot claim the EIC. If you and someone else have the same qualifying child but the other person cannot claim the EIC because he or she is not eligible or his or her earned income or AGI is too high, you may be able to treat the child as a qualifying child. See Example 5. But also see You can choose which person will claim the EIC, earlier.
Example 1 -- child lived with parent and grandparent. You and your 2-year-old son lived with your mother all year. You are 25 years old. Your only income was $9,000 from a part-time job. Your mother's only income was $20,000 from her job. Your son is a qualifying child of both you and your mother because he meets the relationship, age, and residency tests for both you and your mother. However, only one of you can treat him as a qualifying child to claim the EIC (and, if that person qualifies, the other tax benefits listed in You can choose which person will claim the EIC, earlier). You agree to let your mother claim him.
This means, if you do not claim your son as a qualifying child for the EIC or any of the other tax benefits listed in You can choose which person will claim the EIC, your mother can treat your son as a qualifying child to claim the EIC and any other tax benefit listed for which she qualifies.
Example 2 -- child lived with parent and grandparent. The facts are the same as in Example 1 except that you and your mother both claim your son as a qualifying child. In this case, you as the child's parent will be the only one allowed to claim your son as a qualifying child for the EIC and the other tax benefits listed in You can choose which person will claim the EIC. The IRS will disallow your mother's claim to the EIC and any other tax benefit listed, unless she has another qualifying child.
Example 3 -- three children lived with parent and grandparent. The facts are the same as in Example 1 except that you also have two other young children who are qualifying children of both you and your mother. Only one of you can claim each child as a qualifying child. However, you and your mother can split the three qualifying children between you. For example, you can use one child and your mother can use the other two.
Example 4 -- parent is qualifying child of grandparent. The facts are the same as in Example 1 except that you are only 18 years old. This means you are a qualifying child of your mother. Because of Rule 10, discussed next, you cannot claim the EIC. Only your mother may be able to treat your son as a qualifying child to claim the EIC. If your mother meets all the other requirements for claiming the EIC and you do not claim your son as a qualifying child for any of the other tax benefits listed in You can choose which person will claim the EIC, earlier, your mother can treat both you and your son as qualifying children for the EIC.
Example 5 -- parent can claim EIC because grandparent cannot. The facts are the same as in Example 1 except that your mother earned $50,000 from her job. Because your mother's earned income is too high for her to claim the EIC, only you can claim the EIC using your son.
Example 6 -- separated parents. You, your husband, and your 10-year-old son lived together until August 1, 2007, when your husband moved out of the household. In August and September, your son lived with you. For the rest of the year, your son lived with your husband. Your son is a qualifying child of both you and your husband because your son lived with each of you for more than half the year and because he met the relationship and age tests for both of you. At the end of the year, you and your husband still were not divorced, legally separated, or separated under a written separation agreement, so the special rule for divorced or separated parents does not apply.
You and your husband will file separate returns. Your husband agrees to let you treat your son as a qualifying child. This means, if your husband does not claim your son as a qualifying child for the EIC or any of the other tax benefits listed in You can choose which person will claim the EIC, earlier, you can claim him as a qualifying child for the EIC and any other tax benefit listed for which you qualify. However, you cannot claim head of household filing status because you and your husband did not live apart the last 6 months of the year. As a result, your filing status is married filing separately, so you cannot claim the EIC or the credit for child and dependent care expenses. See Rule 3.
Example 7 -- separated parents. The facts are the same as in Example 6 except that you and your husband both claim your son as a qualifying child. In this case, only your husband will be allowed to treat your son as a qualifying child. This is because, during 2007, the boy lived with him longer than with you. You cannot claim the EIC for persons either with or without a qualifying child. However, because you and your husband did not live apart the last 6 months of the year your husband cannot claim head of household filing status. As a result, his filing status is married filing separately, so he cannot claim the EIC or the credit for child and dependent care expenses. See Rule 3.
Example 8 -- unmarried parents. You, your 5-year-old son, and your son's father lived together all year. You and your son's father are not married. Your son is a qualifying child of both you and his father because he meets the relationship, age, and residency tests for both you and his father. You earned $12,000 and your son's father earned $14,000. Neither of you had any other income. Your son's father agrees to let you treat the child as a qualifying child. This means, if your son's father does not claim your son as a qualifying child for the EIC or any of the other tax benefits listed in You can choose which person will claim the EIC, earlier, you can claim him as a qualifying child for the EIC and any other tax benefit listed for which you qualify.
Example 9 -- unmarried parents. The facts are the same as in Example 8 except that you and your son's father both claim your son as a qualifying child. In this case, only your son's father will be allowed to treat your son as a qualifying child. This is because his AGI, $14,000, is more than your AGI, $12,000. You cannot claim the EIC for persons either with or without a qualifying child.
Example 10 -- child did not live with a parent. You and your 7-year-old niece, your sister's child, lived with your mother all year. You are 25 years old, and your only income was $9,300 from a part-time job. Your mother's only income was $15,000 from her job. Your niece is a qualifying child of both you and your mother because she meets the relationship, age, and residency tests for both you and your mother. However, only one of you can treat her as a qualifying child. Your mother agrees to let you treat the child as a qualifying child. This means, if your mother does not claim her as a qualifying child for the EIC or any of the other tax benefits listed in You can choose which person will claim the EIC, you can claim your niece as a qualifying child for the EIC and any other tax benefit listed for which you qualify.
Example 11 -- child did not live with a parent. The facts are the same as in Example 10 except that you and your mother both claim your niece as a qualifying child. In this case, only your mother will be allowed to treat your niece as a qualifying child. This is because your mother's AGI, $15,000, is more than your AGI, $9,300.
Special rule for divorced or separated parents. A child will be treated as the qualifying child of his or her noncustodial parent (for purposes of claiming an exemption, but not for the EIC) if all of the following apply.
For details, see chapter 3. Also see Applying Rule 9 to divorced or separated parents, next.
Applying Rule 9 to divorced or separated parents. If a child is treated as the qualifying child of the noncustodial parent under the special rule for children of divorced or separated parents just described, only the noncustodial parent can claim an exemption and the child tax credit for the child. However, the noncustodial parent cannot claim the child as a qualifying child for the other tax benefits listed in You can choose which person will claim the EIC, earlier. Only the custodial parent or other eligible taxpayer can claim the child as a qualifying child for those tax benefits. However, if the custodial parent and another eligible taxpayer both file a return claiming the child as a qualifying child for any of these four tax benefits, the IRS will disallow all but one of the claims using the tie-breaker rule in Table 36-2.
Table 36-2. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule)
Caution. If a child is treated as the qualifying child of the noncustodial parent under the special rule for divorced or separated parents described later, see Applying Rule 9 to divorced or separated parents. --------------------------------------------------------------------- IF more than one person files a THEN the child will be treated as return claiming the same the qualifying child of the... qualifying child and... --------------------------------------------------------------------- only one of the persons is the parent. child's parent, --------------------------------------------------------------------- two of the persons are parents of parent with whom the child lived the child, and they do not file a the longest during the year. joint return together, --------------------------------------------------------------------- two of the persons are parents of parent with the higher adjusted the child, the child lived with gross income (AGI). each parent the same amount of time during the year, and the parents do not file a joint return together, --------------------------------------------------------------------- none of the persons are the person with the highest AGI. child's parent, ---------------------------------------------------------------------
Rule 10. You Cannot Be a Qualifying Child of Another Person
You are a qualifying child of another person (your parent, guardian, foster parent, etc.) if all of the following statements are true.
For more details about the tests to be a qualifying child, see Rule 8.
If you (or your spouse if filing a joint return) are a qualifying child of another person, you cannot claim the EIC. This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. Put "No" beside line 66a (Form 1040) or line 40a (Form 1040A).
Example. You and your daughter lived with your mother all year. You are 22 years old and attended a trade school full time. You had a part-time job and earned $5,700. You had no other income. Because you meet the relationship, age, and residency tests, you are a qualifying child of your mother. She can claim the EIC if she meets all the other requirements. Because you are your mother's qualifying child, you cannot claim the EIC. This is so even if your mother cannot or does not claim the EIC.
Read this part if you:
Part C discusses Rules 11 through 14. You must meet all four of these rules, in addition to the rules in Parts A and D, to qualify for the earned income credit without a qualifying child.
Caution: If you have a qualifying child, the rules in this part do not apply to you. You can claim the credit only if you meet all the rules in Parts A, B, and D. See Rule 8 to find out if you have a qualifying child.
Rule 11. You Must Be at Least Age 25 but Under Age 65
You must be at least age 25 but under age 65 at the end of 2007. If you are married filing a joint return, either you or your spouse must be at least age 25 but under age 65 at the end of 2007. It does not matter which spouse meets the age test, as long as one of the spouses does.
If neither you nor your spouse meets the age test, you cannot claim the EIC. Put "No" next to line 66a (Form 1040), line 40a (Form 1040A), or line 8a (Form 1040EZ).
Example 1. You are age 28 and unmarried. You meet the age test.
Example 2. You are married and filing a joint return. You are age 23 and your spouse is age 27. You meet the age test because your spouse is at least age 25 but under age 65.
Rule 12. You Cannot Be the Dependent of Another Person
If you are not filing a joint return, you meet this rule if:
If you are filing a joint return, you meet this rule if:
If you are not sure whether someone else can claim you (or your spouse if filing a joint return) as a dependent, read the rules for claiming a dependent in chapter 3.
If someone else can claim you (or your spouse if filing a joint return) as a dependent on his or her return, but does not, you still cannot claim the credit.
Example 1. In 2007, you were age 25, single, and living at home with your parents. You worked and were not a student. You earned $7,500. Your parents cannot claim you as a dependent. When you file your return, you claim an exemption for yourself by not checking the "You" box on line 5 of your Form 1040EZ and by entering $8,750 on that line. You meet this rule.
Example 2. The facts are the same as in Example 1, except that you earned $2,000. Your parents can claim you as a dependent but decide not to. You do not meet this rule. You cannot claim the credit because your parents could have claimed you as a dependent.
Rule 13. You Cannot Be a Qualifying Child of Another Person
You are a qualifying child of another person (your parent, guardian, foster parent, etc.) if all of the following statements are true.
If you (or your spouse if filing a joint return) are a qualifying child of another person, you cannot claim the EIC. This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. Put "No" next to line 66a (Form 1040), line 40a (Form 1040A), or line 8a (Form 1040EZ
Example. You lived with your mother all year. You are age 26 and permanently and totally disabled. Your only income was from a community center where you went three days a week to answer telephones. You earned $3,400 for the year and provided more than half of your own support. Because you meet the relationship, age, and residency tests, you are a qualifying child of your mother for the EIC. She can claim the EIC if she meets all the other requirements. Because you are a qualifying child of your mother, you cannot claim the EIC. This is so even if your mother cannot or does not claim the EIC.
Rule 14. You Must Have Lived in the United States More Than Half of the Year
Your home (and your spouse's, if filing a joint return) must have been in the United States for more than half the year.
If it was not, put "No" next to line 66a (Form 1040), line 40a (Form 1040A), or line 8a (Form 1040EZ).
United States. This means the 50 states and the District of Columbia. It does not include Puerto Rico or U.S. possessions such as Guam.
Homeless shelter. Your home can be any location where you regularly live. You do not need a traditional home. If you lived in one or more homeless shelters in the United States for more than half the year, you meet this rule.
Military personnel stationed outside the United States. U.S. military personnel stationed outside the United States on extended active duty (defined in Rule 8) are considered to live in the United States during that duty period for purposes of the EIC.
Read this part if you have met all the rules in Parts A and B, or all the rules in Parts A and C.
Part D discusses Rule 15. You must meet this rule, in addition to the rules in Parts A and B, or Parts A and C, to qualify for the earned income credit.
This part of the chapter also explains how to figure the amount of your credit. You have two choices.
Rule 15. Your Earned Income Must Be Less Than:
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, is not 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.
Figuring earned income. 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 40a and 40b, 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.
Clergy. 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 in the first space 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).
Church employees. 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 in the first space of the worksheet in Step 5 of the Form 1040 instructions for lines 66a and 66b.
IRS Will Figure the EIC for You
The IRS will figure your EIC for you if you follow the steps explained in this section.
Caution: Do not ask the IRS to figure your EIC unless you are eligible for it. Read the rules in Parts A, B, C, and D to see if you qualify.
Tip: If you want the IRS to also figure the amount of your income tax, see chapter 30.
If you file Form 1040 and want the IRS to figure your credit for you, follow these steps.
If you file Form 1040A and want the IRS to figure your credit for you, follow these steps.
If you file Form 1040EZ and want the IRS to figure your credit for you, follow these steps.
How To Figure the EIC Yourself
To figure the EIC yourself, use the EIC Worksheet in the instructions for the form you are using (Form 1040, Form 1040A, or Form 1040EZ).
Form 1040 and EIC Worksheet. If you file Form 1040 and want to figure the credit yourself, follow these steps.
Form 1040A and EIC Worksheet. If you file Form 1040A and want to figure the credit yourself, follow these steps.
Form 1040EZ and EIC Worksheet. If you file Form 1040EZ and want to figure the credit yourself, follow these steps.
The following two comprehensive examples (complete with filled-in forms) may be helpful.
Example 1. John and Janet Smith (Form 1040A)
John and Janet Smith are married and will file a joint return. They have one child, Amy, who is 3 years old. Amy lived with John and Janet for all of 2007. John worked and earned $9,500. Janet worked part of the year and earned $1,500. Their earned income and AGI are $11,000. John and Janet qualify for the earned income credit and fill out the EIC Worksheet and Schedule EIC. The Smiths will attach Schedule EIC to Form 1040A when they send their completed return to the IRS.
They took the following steps to complete Schedule EIC and the EIC Worksheet.
Completing Schedule EIC
The Smiths complete Schedule EIC because they have a qualifying child. They enter "John and Janet Smith" and John's SSN (the SSN that appears first on their Form 1040A) on the line at the top of Schedule EIC. The Smiths then fill out Qualifying Child Information (lines 1 - 6).
Line 1. The Smiths enter Amy's first name and last name in the column "Child 1."
Line 2. They enter Amy's SSN.
Line 3. They enter Amy's year of birth (2004).
Lines 4a and 4b. The Smiths skip lines 4a and 4b because Amy was born after 1988.
Line 5. The Smiths enter "Daughter." This line shows Amy's relationship to John and Janet.
Line 6. The Smiths enter "12." This is how many months Amy lived with them in 2007.
Completing the EIC Worksheet
Next, the Smiths will complete the EIC Worksheet to figure their earned income credit.
Line 1. The Smiths enter $11,000 (their earned income).
Line 2. The Smiths go to the Earned Income Credit Table in the Form 1040A instructions. The Smiths find their income of $11,000 within the range of $11,000 to $11,050. They follow this line across to the column that describes their filing status and number of children and find $2,853. They enter $2,853 on line 2.
Line 3. The Smiths enter their AGI of $11,000.
Line 4. The Smiths check the "Yes" box because lines 1 and 3 are the same ($11,000). They skip line 5 and enter the amount from line 2 ($2,853) on line 6.
Line 6. The Smiths' EIC is $2,853.
Example 2. Kelly Green (Form 1040EZ)
Kelly Green is age 30 and a full-time student. She lived with her parents in the United States for all of 2007. She had a part-time job and earned $6,240. She earned $20 interest on a savings account. She is not eligible to be claimed as a dependent on her parents' return. Although she lived with her parents, she is not their qualifying child because she does not meet the age test. She does not have any children.
Kelly qualifies for the earned income credit. Kelly will file Form 1040EZ and complete the EIC Worksheet.
Completing the EIC Worksheet
Kelly figures the amount of her earned income credit on the EIC Worksheet as follows.
Line 1. She enters $6,240 (her earned income).
Line 2. Kelly goes to the Earned Income Credit Table in the forms instruction booklet. She finds her earned income of $6,240 in the range of $6,200 to $6,250. Kelly follows this line across to the column that describes her filing status and finds $428. She enters $428 on line 2.
Line 3. Kelly enters $6,260 (her AGI).
Line 4. Kelly checks the "No" box because lines 1 and 3 are not the same.
Line 5. Kelly checks the "Yes" box because the amount on line 3 ($6,260) is less than $6,750. She leaves line 5 blank and enters the amount from line 2, $428, on line 6.
Line 6. She enters $428 here and on Form 1040EZ, line 8a. Kelly's earned income credit is $428.
Do you expect to be eligible for the EIC this year (2008) 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 2009 when you file your tax return for the year 2008. These payments are called advance EIC payments. This part of the chapter explains how you may be able to get them this year and how to report them on your tax return.
Who can get the advance payment of the earned income credit? To get part of the earned income credit paid to you throughout the year in your paycheck, you must meet all the following rules.
Persons who are not entitled to receive advance payments. Under certain circumstances, even if you meet these rules, you may not be entitled to get EIC. If your wages are not subject to federal income tax, social security tax, or Medicare tax withholding, you cannot get the you are a farm worker paid on a daily basis, your employer is not required to pay you the advance amount of the credit.
How To Get Advance Payments for 2008
If you meet the rules stated above under Who can get the advance payment of the earned income credit, give your employer a Form W-5, Earned Income Credit Advance Payment Certificate, for 2008.
After you have read the instructions and completed Form W-5, give the lower part of the form to your employer. Keep the top part for your records.
More than one employer. If you have more than one employer, give a certificate to only one of them. If you are married and both you and your spouse are employed and expect to qualify for the credit, you may give a Form W-5 to your employer and your spouse may give one to his or her employer.
If you receive advance payments of EIC in 2008, you must file a 2008 tax return (even if you would not otherwise have to file) to report the payments and claim any additional EIC. Box 9 of your Form W-2 will show the amount you received. See the instructions for Form 1040 or Form 1040A for the line number on which you report advance payments of EIC.
Receipt of advance payments you do not qualify for. If you receive advance payments of EIC in 2008, and later find out that you are not eligible for some or all of them, you still must report them on your tax return.
Caution: You cannot use Form 1040EZ to report your advance payments. You must file Form 1040 or Form 1040A.
When to give your employer a new Form W-5. The 2008 Form W-5 you give to your employer is valid until December 31, 2008. If you expect to be eligible for EIC in 2009 and you want to receive advance payments, you must give your employer a new Form W-5 in 2009. Do this each year you expect to be eligible for the EIC.
If you no longer want to get advance payments or if your situation changes and you no longer qualify for the earned income credit, you must give your employer a new Form W-5. Check the "No" box on line 1 of the new form.
If your spouse files a Form W-5 with his or her employer, you must file a new Form W-5 with your employer. Check the "Yes" box on line 3.
Advance Payments Received in 2007
If you received advance payments of EIC in 2007, you must file Form 1040 or Form 1040A to report the payments. Your Form W-2, box 9, will show the amount you received. Report the amount on line 61 (Form 1040) or line 36 (Form 1040A).
Caution: You cannot use Form 1040EZ to report your advance payments.
[The following graphic has not been reproduced:
2007 Smiths' Example Schedule EIC (Form 1040A or 1040), Earned Income Credit]
Earned Income Credit (EIC) Worksheet--Lines 40a and 40b
Keep for Your Records
----------------------------------------------------------------------
Part 1: 1. Enter your earned income
All Filers from Step 5 on page 40. 1 11,000
--------------------------------------------
2. Look up the amount on line 1 in
the EIC Table on pages 43-50 to find the
credit. Be sure you use the correct
column for your filing status and the
number of children you have. Enter the
credit here. 2 2,853
If line 2 is zero, STOP You cannot take
the credit. Enter "No" to the left of the
entry space for line 40a.
3. Enter the amount from Form 1040A,
line 22. 3 11,000
-----------------------------------------------
4. Are the amounts on lines 3 and 1 the
same?
[x] Yes. Skip line 5; enter the amount
from line 2 on line 6.
[ ] No. Go to line 5.
----------------------------------------------------------------------
Part 2: 5. If you have:
Filers Who
Answered • No qualifying children, is the amount
"No" on on line 3 less than $7,000 ($9,000
Line 4 if married filing jointly)?
• 1 or more qualifying children, is the
amount on line 3 less than $15,400
($17,400 if married filing jointly)?
[] Yes. Leave line 5 blank; enter the
amount from line 2 on line 6.
[] No. Look up the amount on line 3 in
the EIC Table on pages 43-50 to find
the credit. Be sure you use the
correct column for your filing status
and the number of children you have.
Enter the credit here. 5 ______
Look at the amounts on lines
5 and 2.
Then, enter the smaller amount
on line 6.
----------------------------------------------------------------------
Part 3: 6. This is your earned income credit. 6 2,853
Your Enter this
Earned amount on
Income Form 1040A,
Credit line 40a.
Reminder--
If you have a qualifying child,
complete and attach Schedule EIC.
--------------------------------------------
Caution: If your EIC for a year after 1996
was reduced or disallowed, see
page 41 to find out if you must
file Form 8862 to take the credit
for 2007.
----------------------------------------------------------------------
Earned Income Credit (EIC) Worksheet--Lines 8a and 8b
Keep for Your Records
----------------------------------------------------------------------
Part 1: 1. Enter your earned income
All Filers from Step 2 on page 12. 1 6,240
--------------------------------------------
2. Look up the amount on line 1 above in
the EIC Table on page 14 to find the
credit. Be sure you use the correct
column for your filing status. Enter
the credit here. 2 428
If line 2 is zero, STOP You
cannot take the credit.
Enter "No" in the space to
the left of line 8a.
--------------------------------------------
3. Enter the amount from Form 1040EZ,
line 4. 3 6,260
--------------------------------------------
4. Are the amounts on lines 3 and 1 the
same?
[ ] Yes. Skip line 5; enter the amount
from line 2 on line 6.
[x] No. Go to line 5.
----------------------------------------------------------------------
Part 2: 5. Is the amount on line 3 less than $7,000
Filers Who ($9,000 if married filing jointly)?
Answered
"No" on [x] Yes. Leave line 5 blank; enter the
Line 4 amount from line 2 on line 6.
[ ] No. Look up the amount on line 3 in
the EIC Table on page 14 to find
the credit. Be sure you use the
correct column for your filing status.
Enter the credit here. 5 ______
Look at the amounts on lines
5 and 2.
Then, enter the smaller amount
on line 6.
----------------------------------------------------------------------
Part 3: 6. This is your earned income credit. 6 428
Your Enter this
Earned amount on
Income Form 1040EZ,
Credit line 8a.
-------------------------------------------
Caution: If your EIC for a year after 1996
was reduced or disallowed, see
page 11 to find out if you must
file Form 8862 to take the credit
for 2007.
----------------------------------------------------------------------
EIC Eligibility Checklist
Keep for Your Records
----------------------------------------------------------------------
You may claim the EIC if you answer "Yes" to all
the following questions.*
----------------------------------------------------------------------
Yes No
1. Is your AGI less than: [] []
• $12,590 ($14,590 if married filing jointly) if
you do not have a qualifying child,
• $33,241 ($35,241 if married filing jointly) if
you have one qualifying child, or
• $37,783 ($39,783 if married filing jointly) if
you have more than one qualifying child?
(See Rule 1.)
2. Do you, your spouse, and your qualifying child each [] []
have a valid SSN? (See Rule 2.)
3. Is your filing status married filing jointly, head [] []
of household, qualifying widow(er), or single? (See
Rule 3.)
Caution: If you or your spouse is a nonresident
alien, answer "Yes" only if your filing status
is married filing jointly. (See Rule 4.)
4. Answer "Yes" if you are not filing Form 2555 or [] []
Form 2555-EZ. Otherwise, answer "No."
(See Rule 5.)
5. Is your investment income $2,900 or less? [] []
(See Rule 6.)
6. Is your total earned income at least $1 but less than: [] []
• $12,590 ($14,590 if married filing jointly) if
you do not have a qualifying child,
• $33,241 ($35,241 if married filing jointly) if
you have one qualifying child, or
• $37,783 ($39,783 if married filing jointly) if
you have more than one qualifying child?
(See Rules 7 and 15.)
7. Answer "Yes" if you (and your spouse if filing a joint [] []
return) are not a qualifying child of another
person. Otherwise, answer "No." (See Rules 10 and 13.)
STOP: If you have a qualifying child, answer
questions 8 and 9 and skip 10-12. If you do
not have a qualifying child, skip questions 8
and 9 and answer 10-12.*
8. Does your child meet the age, residency, and [] []
relationship tests for a qualifying child?
(See Rule 8.)
9. Is your child a qualifying child only for you? Answer [] []
"Yes" if your qualifying child also meets the tests to
be a qualifying child of another person, but the other
person is not claiming any child-related tax benefits
using that child. Answer "No" if you do not know
whether the other person is claiming any child-related
tax benefits using that child.
10. Were you (or your spouse if filing a joint return) at [] []
least age 25 but under 65 at the end of 2007?
(See Rule 11.)
11. Answer "Yes" if you (and your spouse if filing a joint [] []
return) cannot be claimed as a dependent on anyone
else's return. Answer "No" if you (or your spouse if
filing a joint return) can be claimed as a dependent
on someone else's return. (See Rule 12.)
12. Was your main home (and your spouse's if filing a [] []
joint return) in the United States for more
than half the year? (See Rule 14.)
----------------------------------------------------------------------
* Persons With A Qualifying Child: If you answered "Yes" to questions
1 through 9, you can claim the EIC. Remember to fill out Schedule EIC
and attach it to your Form 1040 or Form 1040A. You cannot use Form
1040EZ. If you answered "Yes" to questions 1 through 8 and "No" to
question 9, see Rule 9 to help you determine whether you can claim
the EIC. If you answered "Yes" to questions 1 through 7 and "No" to
question 8, answer questions 10 through 12 to see if you can claim
the EIC without a qualifying child.
Persons Without A Qualifying Child: If you answered "Yes" to
questions 1 through 7, and 10 through 12, you can claim the EIC.
If you answered "No" to any question that applies to you: You
cannot claim the EIC.
======================================================================
Adoption credit. The maximum adoption credit increases to $11,390. See Adoption Credit for more information.
Refundable credit for prior year minimum tax. If you have any unused minimum tax credit carryforward from 2004 or earlier years, you may qualify for a refund of that credit amount. See Refundable Credit for Prior Year Minimum Tax for more information.
Excess withholding of social security tax and railroad retirement tax. Social security tax and tier 1 railroad retirement (RRTA) tax are both withheld at a rate of 6.2% of wages. The maximum wages subject to these taxes increased to $97,500 in 2007. The withholding rate of tier 2 RRTA is 3.9% of wages in 2007. The maximum wages subject to this tax increased to $72,600 in 2007. If you had too much social security or RRTA tax withheld during 2007, you may be entitled to a credit of the excess withholding. For more information about the credit, see Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld under Refundable Credits, later.
Credit for federal telephone excise tax paid. The credit for federal telephone excise tax was only available on your 2006 return. If you did not request this credit on your 2006 return, file Form 1040X using a simplified procedure explained in its instructions to amend your 2006 return.
This chapter discusses the following nonrefundable credits.
This chapter also discusses the following refundable credits.
Several other credits are discussed in other chapters in this publication.
Nonrefundable credits. The first part of this chapter, Nonrefundable Credits, covers nine credits that you subtract from your tax. These credits may reduce your tax to zero. If these credits are more than your tax, the excess is not refunded to you.
Refundable credits. The second part of this chapter, Refundable Credits, covers four credits that are treated as payments and are refundable to you. These credits are added to the federal income tax withheld and any estimated tax payments you made. If this total is more than your total tax, the excess will be refunded to you.
Useful Items
You may want to see:
Publication
Form (and Instructions)
The credits discussed in this part of the chapter can reduce your tax. However, if the total of these credits is more than your tax, the excess is not refunded to you.
You may be able to take a tax credit of up to $11,390 for qualified expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualified expenses.
If your modified adjusted gross income (AGI) is more than $170,820, your credit is reduced. If your modified AGI is $210,820 or more, you cannot take the credit.
Qualified adoption expenses. Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:
Nonqualified expenses. Qualified adoption expenses do not include expenses:
Eligible child. The term "eligible child" means any individual:
Child with special needs. An eligible child is a child with special needs if all three of the following apply.
When to take the credit. Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses were paid or incurred. If the adoption becomes final, you take the credit in the year your expenses were paid or incurred. See the instructions for Form 8839 for more specific information on when to take the credit.
Foreign child. If the child is not a U.S. citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.
How to take the credit. To take the credit, you must complete Form 8839 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54, and check box c on that line.
Alternative Motor Vehicle Credit
You may be able to take a credit if you place an alternative motor vehicle in service in 2007.
Alternative motor vehicle. An alternative motor vehicle is a new vehicle that qualifies as one of the following four types of vehicles.
Amount of credit. Generally, for a qualified alternative fuel motor vehicle, an advanced lean burn technology vehicle, or for a passenger car or truck (light or heavy duty) that is a qualified hybrid vehicle, you can rely on the manufacturer's (or, in the case of a foreign manufacturer, its domestic distributor's) certification that a specific make, model, and model year vehicle qualifies for the credit and the maximum amount of the credit for which it qualifies. For an updated list of certified vehicles and the specific credit amounts for each model, go to www.irs.gov/newsroom/article/0,,id=157557,00.html on the Internet.
Additional requirements. In addition to the manufacturer's (or domestic distributor's) certification, the following requirements must be met to qualify for the credit:
Phaseout of credit. Ordinarily the amount of the credit is 100% of the manufacturer's (or domestic distributor's) certification of the maximum credit allowable as explained above. However, if you purchased a qualified hybrid or advanced lean burn technology vehicle from a manufacturer who previously sold at least 60,000 of these vehicles, the amount of your credit may be reduced. Your manufacturer should give you the information you need to figure your phaseout percentage. See the Form 8910 instructions.
Caution: The phaseout period has begun for certain qualified hybrid vehicles purchased for use or lease in 2007. See IRS news article, Summary of the Credit for Qualified Hybrid Vehicles, on the Internet at www.irs.gov/newsroom/article/0,,id=157557,00.html.
Recapture of credit. If the vehicle no longer qualifies for the credit, you must recapture part or all of the credit.
How to take the credit. To take the credit, you must complete Form 8910 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c and enter "8910" on the line next to box c.
More information. For more information on the credit, see the instructions for Form 8910.
Alternative Fuel Vehicle Refueling Property Credit
You may be able to take a credit if you place qualified alternative fuel vehicle refueling property in service in 2007.
Qualified alternative fuel vehicle refueling property. Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used to store or dispense alternative fuel into the fuel tank of a motor vehicle propelled by the fuel, but only if the storage or dispensing is at the point where the fuel is delivered into the tank.
Amount of the credit. For personal use property, the credit is generally the smaller of 30% of the property's cost or $1,000. For business use property, the credit is generally the smaller of 30% of the property's cost or $30,000. Each property's cost must first be reduced by any section 179 deduction before figuring the credit.
How to take the credit. To take the credit, you must complete Form 8911 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c and enter "8911" on the line next to box c.
More information. For more information on the credit, see the instructions for Form 8911.
Credit for Clean Renewable Energy Bonds or Gulf Tax Credit Bonds
You may be able to take a credit if you are a holder of a clean renewable energy bond (CREB) or Gulf tax credit bond (GTCB). CREBs are tax credit bonds issued after 2005 by certain tax-exempt electricity providers to finance renewable energy projects. GTCBs are tax credit bonds issued after 2005 by the state of Alabama, Louisiana, or Mississippi that are designated by the governor of those states as GTCBs and that meet certain other requirements. The issuers do not pay interest on both types of bonds. Instead of receiving interest, the bond-holders qualify to claim a tax credit.
Who can claim the credits. If you hold a CREB and/or a GTCB on 1 or more credit allowance dates, you can claim either the CREB credit or the GTCB credit by filing Form 8912. The credit allowance dates are:
The credit allowance date also includes the last day on which the CREB or GTCB is outstanding.
Amount of credit. The amount of the credit with respect to each credit allowance date is generally equal to 25% of the annual credit for the bond. However, the 25% will be prorated for the quarters in which the bond is issued, redeemed or matures.
Interest income. The amount of any tax credit allowed (figured before applying tax liability limits) must be included as interest income on your tax return.
How to take the credit. To take either credit, you must complete Form 8912 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55. Check box c, and enter "8912" on the line next to box c.
More information. For more information on these credits, see the instructions for Form 8912.
You generally can choose to take income taxes you paid or accrued during the year to a foreign country or U.S. possession as a credit against your U.S. income tax. Or, you can deduct them as an itemized deduction (see chapter 22).
You cannot take a credit (or deduction) for foreign income taxes paid on income that you exclude from U.S. tax under any of the following.
Limit on the credit. Unless you can elect not to file Form 1116 (see Exception, later), your foreign tax credit cannot be more than your U.S. tax liability (Form 1040, line 44), multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. See Publication 514 for more information.
How to take the credit. Complete Form 1116 and attach it to your Form 1040. Enter the credit on Form 1040, line 51.
Exception. You do not have to complete Form 1116 to take the credit if all of the following apply.
For more details on these requirements, see the instructions for Form 1116.
The mortgage interest credit is intended to help lower-income individuals own a home. If you qualify, you can take the credit each year for part of the home mortgage interest you pay.
Who qualifies. You may be eligible for the credit if you were issued a qualified mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.
Amount of credit. Figure your credit on Form 8396. If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount (loan) shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.
If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.
Certified indebtedness
amount on your MCC
---------------------------
Original amount of your
mortgage
Limit based on credit rate. If the certificate credit rate is more than 20%, the credit you are allowed cannot be more than $2,000. If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, this $2,000 limit must be divided based on the interest held by each person. See Publication 530 for more information.
Carryforward. Your credit (after applying the limit based on credit rate) is also subject to a limit based on your tax that is figured using Form 8396. If your allowable credit is reduced because of this tax liability limit, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.
If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).
How to take the credit. Figure your 2007 credit and any carryforward to 2008 on Form 8396, and attach it to your Form 1040. Be sure to include any credit carryforward from 2004, 2005, and 2006.
Include the credit in your total for Form 1040, line 54, and check box a.
Reduced home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2008. For more information about the home mortgage interest deduction, see chapter 23.
Recapture of federal mortgage subsidy. If you received an MCC with your mortgage loan, you may have to recapture (pay back) all or part of the benefit you received from that program. The recapture may be required if you sell or dispose of your home at a gain during the first 9 years after the date you closed your mortgage loan. See Publication 523, Selling Your Home, for more information.
Nonrefundable Credit for Prior Year Minimum Tax
The tax laws give special treatment to some kinds of income and allow special deductions and credits for some kinds of expenses. If you benefit from these laws, you may have to pay at least a minimum amount of tax in addition to any other tax on these items. This is called the alternative minimum tax.
The special treatment of some items of income and expenses only allows you to postpone paying tax until a later year. If in prior years you paid alternative minimum tax because of these tax postponement items, you may be able to take a credit for prior year minimum tax against your current year's regular tax.
You may be able to take a credit against your regular tax if for 2006 you had:
The amount of the credit cannot reduce your current year's tax below your current year's tentative alternative minimum tax.
Refundable credit. If you have any unused minimum tax credit carryforward from 2004 or earlier years, you may qualify for a refund of that credit amount. For more information, see Refundable Credit for Prior Year Minimum Tax, later.
How to take the credit. Figure your 2007 nonrefundable credit (if any), and any carryforward to 2008 on Form 8801, and attach it to your Form 1040. Include the credit in your total for Form 1040, line 55, and check box b. You can carry forward any unused credit for prior year minimum tax to later years until it is completely used.
More information. For more information about the credit, see the instructions for Form 8801.
Residential Energy Credits
You may be eligible for 2 credits, the nonbusiness energy property credit and the residential energy efficient property credit, if you made energy saving improvements to your home.
Nonbusiness energy property credit. You may be able to take this credit for any of the following improvements to your main home located in the United States in 2007 if they are new and meet certain requirements for energy efficiency.
You may also be able to claim this credit for the cost of any of the following items if the items meet certain performance and quality standards.
For more information about the nonbusiness energy property credit, see the Instructions for Form 5695.
Residential energy efficient property credit. You may be able to take this credit if you paid for any of the following during 2007.
For more information about the residential energy efficient property credit, see the instructions for Form 5695.
Condominiums and cooperative apartments. If you are a member of a condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of such association or corporation for purposes of these credits.
Basis reduction. You must reduce the basis of your home by the amount of any credits allowed.
How to take the credits. To take either of the credits, you must complete Form 5695 and attach it to your Form 1040. Enter the credit on Form 1040, line 50.
More information. For more information on these credits, see the instructions for Form 5695.
Retirement Savings Contributions Credit
You may be able to take this credit if you, or your spouse if filing jointly, made:
However, you cannot take the credit if either of the following applies.
Student. You were a student if during any part of 5 calendar months of 2007 you:
School. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
How to take the credit. Figure the credit on Form 8880. Enter the credit on your Form 1040, line 53, or your Form 1040A, line 33, and attach Form 8880 to your return.
The credits discussed in this part of the chapter are treated as payments of tax. If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, the excess can be refunded to you.
Credit for Tax on Undistributed Capital Gain
You must include in your income any amounts that regulated investment companies (commonly called mutual funds) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even if you did not actually receive them. If the mutual fund or REIT paid a tax on the capital gain, you are allowed a credit for the tax since it is considered paid by you. The mutual fund or REIT will send you Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, showing your share of the undistributed capital gains and the tax paid, if any. Take the credit for the tax paid by entering the amount on Form 1040, line 70, and checking box a. Attach Copy B of Form 2439 to your return. See Capital Gain Distributions in chapter 8 for more information on undistributed capital gains.
Health Coverage Tax Credit
You may be able to take this credit for any month in which all the following statements were true on the first day of the month.
But, you cannot take the credit if you can be claimed as a dependent on someone else's 2007 tax return. If you meet all of these conditions, you may be able to take a credit of up to 65% of the amount you paid for qualified health insurance coverage for you and any qualifying family members. The amount you paid for qualified health insurance coverage must be reduced by any (a) Archer MSA and health savings account distributions used to pay for the coverage, and (b) National Emergency Grants you received for health insurance in 2007.
You can take this credit on your tax return or have it paid on your behalf in advance to your insurance company. If the credit is paid on your behalf in advance, that amount will reduce the amount of the credit you can take on your tax return.
For definitions and special rules, including those relating to qualified health insurance plans, qualifying family members, and employer-sponsored health insurance plans, see Publication 502 and the instructions for Form 8885.
TAA Recipient
You were an eligible TAA recipient on the first day of the month if, for any day in that month or the prior month, you:
Example. You received a trade adjustment allowance for January 2007. You were an eligible TAA recipient on the first day of January and February.
Alternative TAA Recipient
You were an eligible alternative TAA recipient on the first day of the month if, for that month or the prior month, you received benefits under an alternative trade adjustment assistance program for older workers established by the Department of Labor.
Example. You received benefits under an alternative trade adjustment assistance program for older workers for October 2007. The program was established by the Department of Labor. You were an eligible alternative TAA recipient on the first day of October and November.
PBGC Pension Recipient
You were an eligible PBGC pension recipient on the first day of the month, if both of the following apply.
If you received a lump-sum payment from the PBGC after August 5, 2002, you meet item (2) above for any month that you would have received a PBGC benefit if you had not received the lump-sum payment.
How To Take the Credit
To take the credit, complete Form 8885 and attach it to your Form 1040. Include your credit in the total for Form 1040, line 70, and check box c.
You must attach invoices and proof of payment for any amounts you include on Form 8885, line 2, for which an advance payment of the credit was not made on your behalf. For details, see Publication 502 or Form 8885.
Refundable Credit for Prior Year Minimum Tax
If you paid the alternative minimum tax for 2006 or you had a minimum tax credit carryforward to 2007, you may be able to take a credit for prior year minimum tax. For information about the nonrefundable credit for prior year minimum tax you may be able to take, see Nonrefundable Credit for Prior Year Minimum Tax, earlier. However, for 2007, you may qualify for a refundable credit for prior year minimum tax if you have any unused minimum tax credit carryforward from 2004 or earlier years, even if the total amount of your current year credit is more than your total tax liability. To figure the amount of any 2007 refundable credit, complete Part IV of Form 8801. Include any refundable credit on Form 1040, line 71. You can carry forward any unused credit for prior year minimum tax to later years.
Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld
Most employers must withhold social security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.
If you worked for two or more employers in 2007, you may have had too much social security or tier 1 RRTA tax withheld from your pay. You can claim the excess social security or tier 1 RRTA tax as a credit against your income tax. The following table shows the maximum amount of wages subject to tax and the maximum amount of tax that should have been withheld for 2007.
Maximum tax
Maximum that should
wages have been
Type of tax subject to tax withheld
Social security or
RRTA tier 1 $97,500 $6,045.00
RRTA tier 2 $72,600 $2,831.40
Caution: All wages are subject to Medicare tax withholding.
Tip: Use Form 843, Claim for Refund and Request for Abatement, to claim a refund of excess tier 2 RRTA tax. Be sure to attach a copy of all of your W-2 forms. See the worksheet in Publication 505, Tax Withholding and Estimated Tax, to help you figure the excess amount.
Employer's error. If any one employer withheld too much social security or tier 1 RRTA tax, you cannot take the excess as a credit against your income tax. The employer should adjust the tax for you. If the employer does not adjust the overcollection, you can file a claim for refund using Form 843.
Joint return. If you are filing a joint return, you cannot add the social security or tier 1 RRTA tax withheld from your spouse's wages to the amount withheld from your wages. Figure the withholding separately for you and your spouse to determine if either of you has excess withholding.
How to figure the credit if you did not work for a railroad. If you did not work for a railroad during 2007, figure the credit as follows:
1. Add all social security tax withheld (but not more than $6,045.00 for each employer). Enter the total here ________ 2. Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 63 ________ 3. Add lines 1 and 2. If $6,045.00 or less, stop here. You cannot take the credit ________ 4. Social security tax limit 6,045.00 5. Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 67 (or Form 1040A, line 42) ========
Example. You are married and file a joint return with your spouse who had no gross income in 2007. During 2007, you worked for the Brown Shoe Company and earned $60,000 in wages. Social security tax of $3,720 was withheld. You also worked for another employer in 2007 and earned $51,000 in wages. $3,162 of social security tax was withheld from these wages. Because you worked for more than one employer and your total wages were more than $97,500, you can take a credit of $837.00 for the excess social security tax withheld.
1. Add all social security tax withheld
(but not more than $6,045.00 for
each employer). Enter the total
here $6,882.00
2. Enter any uncollected social
security tax on tips or group-term
life insurance included in the total
on Form 1040, line 63 -0-
3. Add lines 1 and 2. If $6,045.00 or
less, stop here. You cannot take the
credit 6,882.00
4. Social security tax limit 6,045.00
5. Credit. Subtract line 4 from line 3.
Enter the result here and on
Form 1040, line 67 (or Form 1040A,
line 42) $837.00
=========
How to figure the credit if you worked for a railroad. If you were a railroad employee at any time during 2007, figure the credit as follows:
1. Add all social security and tier 1 RRTA tax withheld (but not more than $6,045.00 for each employer). Enter the total here _________ 2. Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 63 _________ 3. Add lines 1 and 2. If $6,045.00 or less, stop here. You cannot take the credit _________ 4. Social security and tier 1 RRTA tax limit 6,045.00 5. Credit. Subtract line 4 from line 3. Enter the result here and on Form 1040, line 67 (or Form 1040A, line 42) =========
How to take the credit. Enter the credit on Form 1040, line 67, or include it in the total for Form 1040A, line 42.
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