It may seem obvious, as this rule is stated in the name of the credit, but in order to claim the Earned Income Tax Credit, you must have earned income from working. Couples who are married will meet this requirement if they file a joint return and at least one spouse has income from working. Earned income is inclusive of all the taxable monies you earn as an employee from your employer. Self-employed individuals can determine their earned income amounts on Worksheet B when filling out Form 1040.
Earned income includes:
- Wages, salaries, tips, commissions, and other taxable pay. Income that is not taxed, such as dependent care benefits, is not classified as earned income. The only exception is nontaxable combat pay, which you can opt to include in your earned income.
- Self-employment net earnings
- Gross income earned as a statutory employee
- Benefits paid by a union as part of a strike fund
- Disability benefits received before minimum retirement age (not including disability insurance)
As an employee, you will receive a Form W-2, in which all of your earned wages, salaries, and tips will be reported in Box 1, and you can transcribe the information onto your tax return. Nontax combat pay, reported in box 12 on your W-2, can be included if you wish, as it may affect your eligibility for the Earned Income Tax Credit.
Self-employment income comes from owning your own business, or being a minister or organizer of a religious order. If you receive housing as part of your ministry pay, while it is not subject to income tax it will be included as taxable income in relation to the EITC, unless you are exempt through an approved Form 4361 or Form 4029. If box 13 on your Form W-2 is checked, you are considered a statutory employee, and you must report income and expenses on a Schedule C.
The following are NOT considered to be earned income:
- Interest and dividends
- Pensions and annuities
- Social Security and railroad retirement benefits
- Alimony and child support
- Welfare benefits
- Worker’s Compensation benefits
- Veteran’s benefits
- Nontaxed foster care payments
For more complicated situations, such as married couples who live separately and have income together under a state community property law, or for determining which income is considered earned for inmates, contact the IRS or your tax preparer, as there are special requirements for determining eligibility for the EITC.