Chapter 8: Earned Income Credit

Chapter Content
• Earned Income Credit (EIC)

• Due Diligence for Tax Preparers

Learning Objectives
• Distinguish Between Nonrefundable and Refundable Credits

• Know how to Figure and Report EIC

• Understand the Importance of Due Diligence

Tax Credits
Unlike a tax deduction, which reduces the amount of income subject to tax, a tax credit is a dollar-for
dollar reduction of the tax itself.

• Tax credits can be nonrefundable credits, refundable credits, and sometimes partly refundable.
• A tax credit can substantially reduce the amount of tax owed or make a tax refund bigger.
• However, not all tax credits are alike.

A nonrefundable credit is subtracted directly from your tax reported on line 16 of Form 1040 and can
reduce your income tax to zero.

• However, if the amount of your credit is more than the tax, you will not receive a refund of the
unused amount. In other words, you cannot reduce your tax below zero, or create a refund via a
nonrefundable credit.

There are several nonrefundable credits, and they are generally applied in the order in which they appear
on Form 1040, Schedule 3.

• If your income tax is reduced to zero by the first credit on the list, you will not be able to claim
any of the remaining non-refundable credits.

Chapter 8 196 | P a g e
Form 1040, Schedule 3, Additional Credits and Payments

Chapter 8 197 | P a g e
A refundable credit is treated as a payment and is included (along with any federal income tax withheld,
estimated tax payments, etc.) in the “Payments” section of the return.

• If the total payments (Form 1040, line 33) are more than the total tax (line 24 of Form 1040), the
excess is received as a refund.
• You do not have to have tax liability or have any taxes withheld to receive a refund as a result of
a refundable credit.

Earned Income Credit

The earned income credit (EIC), also called the earned income tax credit (EITC), is a tax credit for
certain people who work and have earned income under $63,398 in 2023.

• Whether or not you qualify depends on your earned income, filing status, and your number of
qualifying children.
• Because the earned income credit is a refundable credit, you can receive a refund even if you
have no tax liability and/or had no income tax withheld.

EIC is reported on Form 1040, line 27.

Chapter 8 198 | P a g e
Publication 596 provides fifteen (15) separate rules that must be met to claim an earned income credit.

Some rules apply to all taxpayers, while others depend on whether the taxpayer has a qualifying child.
Publication 596: Table 1 (2023) summarizes these 15 rules.

Chapter 8 199 | P a g e
Rules for Everyone (1-7)
1. For the tax year 2023, your AGI must be less than:
a. $56,838 ($63,398 if married filing jointly) with three or more qualifying children
b. $52,918 ($59,478 if married filing jointly) with two qualifying children
c. $46,560 ($53,120 if married filing jointly) with one qualifying child
d. $17,640 ($24,210 if married filing jointly) without a qualifying child

Example: Clark has two qualifying children and files as head of household. He has $48,500 in wages on
line 1 of Form 1040 and his AGI on line 11 of Form 1040 is $54,864. For EIC purposes, his earned
income is $48,500 (i.e., his taxable wages). However, because his AGI is not less than $52,918. Clark
cannot claim the earned income credit even if he meets all the other requirements.

2. You must have a valid social security number for yourself, your spouse, and all your qualifying
children by the due date of your return (including extensions).
a. You cannot claim the EIC on either the original or an amended return if you (or your
spouse, if filing jointly) do not receive a valid SSN until after the due date (including
extensions) of the tax return at issue.
b. If you or your spouse do not have a valid SSN on or before the due date of your tax
return (including extensions) and you later get a valid SSN, you cannot file an amended
return to claim the EIC.
c. If the filing deadline for your return is approaching, and you (or your spouse) still have
not obtained a valid SSN, you may want to consider filing for an automatic 6-month
extension to have more time to obtain your SSN before you file your return.
d. You can apply for an SSN by filing Form SS-5 with the Social Security Administration.
e. Also, a child cannot be a qualifying child in figuring the EIC on either the original or an
amended return if that child did not have an SSN until after the due date (including
extensions).
f. Social security cards that say, “Not valid for employment” and ITINs are not valid for the
EIC.
g. If you (or your spouse, if filing jointly) do not have a valid SSN on or before the due date
of the return (including extensions), enter "No" on the dotted line next to line 27 of Form
1040.
3. If you are married but separated from your spouse, not filing a joint return, and had a qualifying
child who lived with you for more than half the year, you can claim the EIC if:
a. You lived apart from your spouse for the last six months of the year, or
b. You are legally separated (under state law) under a written separation agreement, or a
decree of separate maintenance and you didn't live in the same household as your spouse
at the end of 2023.
4. You must be a U.S. citizen or resident alien all year.
a. If you or your spouse were a nonresident alien for any part of the year, you cannot claim
the EIC unless your filing status is MFJ.
i. You can choose to file jointly only if one spouse is a US citizen or resident alien,
and you choose to treat the nonresident spouse as a US resident.
ii. If you make this choice, you and your spouse are taxed on your worldwide
income.

Chapter 8 200 | P a g e
 b. If you or your spouse were a nonresident alien for any portion of the tax year and your filing
status is not MFJ, enter "No" on the dotted line next to line 27 of Form 1040.
5. You cannot file Form 2555, Foreign Earned Income (to exclude income earned in foreign
countries).
6. Your investment income cannot be more than $11,000.
a. For most people, investment income is the total of taxable and tax-exempt interest
income, dividend income, and net capital gain income.

b. There are additional sources of investment income subject to the limit (see Rule 6 in
Chapter 1 of Pub. 596) if:

i. You are filing Schedule E (Form 1040), Form 4797, or Form 8814.
ii. You are reporting income from the rental of personal property on Schedule 1
(Form 1040), line 8.
iii. You have income or loss from a passive activity.
7. You must have earned income.
a. This credit is called the “earned income credit” because you must work and have earned
income to claim the credit.
i. If married and filing jointly, this rule is met if at least one spouse works and has
earned income.
b. For most people, earned income is reported on line 1 of Form 1040 (e.g., W-2 wages,
tips).
i. Net earnings from self-employment income are also earned income.

Example: Lance’s only income is from his social security benefits and investments. No
matter the other circumstances of Lance’s life, he does not qualify for the earned income credit because
he has no earned income.

c. You can elect to have your nontaxable combat pay included as earned income to figure
the earned income credit.
i. Doing so may increase or decrease EIC.
ii. Choose the option that yields the higher credit.
iii. If the election is made, all nontaxable combat pay must be included in earned
income.
iv. The amount of nontaxable combat pay is shown on Form W-2, box 12, code Q.
1. It is not included on line 1 of Form 1040.
d. Taxable long-term disability benefits received before reaching the minimum retirement
age are considered earned income and may be reported to you on Form 1099-R with code
3 in box 7.
i. After reaching retirement age, these payments will be considered unearned
income.
ii. The minimum retirement age is generally the age at which you can first receive a
pension or annuity from your employer if you are not disabled.

Example: Linda is in the military, is single, and provides a home for her only child. Her only income is
from her Form W-2 which shows $2,000 in box 1 and $23,000 in box 12 code Q. The EIC computation

Chapter 8 201 | P a g e
without the combat pay election would be $689. If she makes the election to include nontaxable combat
pay in earned income, the EIC would be $3,441. Linda should make the election.

Rules if You Have a Qualifying Child (Rules 8-10)

8. You must attach a Schedule EIC to your Form 1040 to claim the EIC with a qualifying child. A
qualifying child must meet all of the four following tests:
a. Relationship,
b. Age,
c. Residency, and
d. Joint return tests.

These tests are the same as the tests for a dependent qualifying child, except that for EIC there is NO
SUPPORT TEST.

Relationship Test: To meet the relationship test, a child must be:

• A son, daughter, stepchild, eligible foster child, or a descendant of any of them (e.g., your
grandchild), or
• A brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them
(e.g., your niece or nephew).

Example: Julie’s nephew Al, who is 14, has lived with Julie since Al’s parents passed away three years
ago. Al meets the relationship test because he is the child of her brother.

• A grandchild is any descendant of your son, daughter, stepchild, or adopted child and includes
great-grandchildren.
• Your child does not have to be your dependent unless the child is married.
o A married child is a qualifying child if you can claim that child as a dependent.
o Or if the reason you cannot claim the child as a dependent is that there is a signed
Form 8332 or a similar statement allowing the child’s other parent to claim him/her.
• An adopted child is always treated as your own child.
o The term “adopted child” includes a child who was lawfully placed with you for legal
adoption, even if the adoption is not final.

• For the EIC, a person is your foster child if the child is placed with you by an authorized
placement agency or by judgment, decree, or other order of any court of competent jurisdiction.
o An authorized placement agency includes:
a state or local government agency
a tax-exempt organization licensed by a state.
an Indian tribal government
an organization authorized by an Indian tribal government.

Age Test: Your child must be:

• under 19 years old at the end of the tax year and younger than you (or your spouse if filing MFJ),
or
Chapter 8 202 | P a g e
 • a full-time student under age 24 at the end of the tax year and younger than you (or your spouse
if filing MFJ), or
• permanently and totally disabled. This is true if:
o the child cannot engage in any substantial gainful activity because of a physical or
mental condition, and
o a doctor determines whether the condition has lasted or can be expected to last
continuously for at least a year or can lead to death.

Example: Todd was 19 at the end of the year and lived with his mother and father who supported him.
Todd does not go to school, and he is not disabled. Todd does not meet the age test because he is not
under age 19 and does not meet either of the exceptions.

Example: Thelma is 25 and cannot be gainfully employed because of a severe physical disability. A
doctor has determined that her condition has lasted at least a year. Thelma meets the age test because she
is totally and permanently disabled.

Residency Test
• Your child must have lived with you in the United States for more than half the year.
o You cannot claim the EIC if your child did not live with you for more than half the
year, even if you paid for most of the child’s living expenses.
• Temporary absences due to a special circumstance do not count against the residency test.
o Special circumstances include illness, attending school, business, vacation, military
service, and detention in a juvenile facility.
• Your child who is born or dies during the tax year is considered to have lived with you for the
required time if your home was the child’s home for more than half the amount of time he or she
was alive during the year.
o The same is true if the child lived with you for more than half the year except for any
required hospital stay following birth.
• The United States includes the fifty states and the District of Columbia.
o The term does not include Puerto Rico or US possessions.
• The IRS may ask you for documents to show you lived with each qualifying child.
o Documents you might want to keep for this purpose include school and childcare
records and other records that show your child's address.

Joint Return Test

• Your child cannot file a joint return with their spouse unless they are filing the joint return only
to claim a refund of estimated tax paid or income tax withheld.

Chapter 8 203 | P a g e
 9. Only one person gets to treat the child as a qualifying child.

• Doing so entitles that person to claim all the following tax benefits, assuming eligibility:
o The Child Tax Credit/Additional Child Tax Credit/Credit for Other
Dependent
o Head of Household filing status
o The credit for child and dependent care expenses
o The exclusion from income for dependent care benefits
o The Earned Income Credit

Chapter 8 204 | P a g e
No other person can take any of these benefits based on this qualifying child.

• You and the other person cannot divide these tax benefits between yourselves.
• The other person cannot take any of these tax benefits unless they have a different qualifying
child.

If you and another person have the same qualifying child, you and the other person can decide which
one will treat the child as a qualifying child.

If you and the other person cannot agree, and more than one person files a return claiming the same
child, the IRS will disallow all but one of the claims using tie-breaker rules.

Tiebreaker rules. To determine which person can treat the child as a qualifying child to claim these tax
benefits, the following tiebreaker rules apply.

• If only one person is the child’s parent, the child is treated as the qualifying child of the
parent.
• If the parents file a joint return together and can claim the child as a qualifying child, the
child is treated as the qualifying child of the parents.
• If the parents do not file a joint return together but both parents claim the child as a
qualifying child, the IRS will treat the child as the qualifying child of the parent with whom
the child lived for a longer period during the year.
o If the child lived with each parent for the same amount of time, the IRS
would treat the child as the qualifying child of the parent who had the
higher adjusted gross income (AGI) for the year.
• If no parent can claim the child as a qualifying child, the child is treated as the qualifying
child of the person who had the highest AGI for the year.
• If a parent can claim the child as a qualifying child but no parent does claim the child, the
child is treated as the qualifying child of the person who had the highest AGI for the year, but
only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can
claim the child.

Example: Wanda, age 24, and her 4-year-old son lived with Wanda’s mother for the entire year. Wanda’s
only income was $14,000 from her job and her mother’s only income was $20,000 from her job.

Wanda does not meet the age test, so she is not a qualifying child for her mother. Wanda’s son is a
qualifying child for both Wanda and her mother (he is Wanda’s son and her mother’s grandson, he is
under age 19, and he resided with Wanda and her mother for more than half the year in the United
States). However, only one of them can use him to claim EIC.

Wanda and her mother can choose who will treat the son as a qualifying child to claim the EIC. If they
cannot agree, the IRS will treat the son as the qualifying child of Wanda since she is the parent. Wanda
also gets to claim the other tax benefits based on this qualifying child (assuming she qualifies). In this
scenario, because Wanda’s mother cannot claim Wanda’s son as a dependent if she has no other
qualifying person, she also cannot claim head of household, the child tax credit, or the credit for child
and dependent care benefits.

Chapter 8 205 | P a g e
If a child is treated as the qualifying child of the noncustodial parent under the rules for divorced or
separated parents, this is the ONLY time the tax benefits noted above may be divided between two
taxpayers.

The benefits are available to split in only this way:

• Only the noncustodial parent can claim the dependent and the child tax credit/additional child tax
credit for the child.
o The noncustodial parent cannot claim the child as a qualifying child for head of
household filing status, the credit for child and dependent care expenses, or the EIC.
• Only the custodial parent can claim the credit for the child and dependent care expenses and only
the custodial parent can treat the child as a dependent for the health coverage tax credit.
• The Head of Household filing status and EIC may be claimed by the custodial parent or other
eligible people.
o If the child is the qualifying child of more than one person for these benefits, then the
tiebreaker rules just explained determine which one of the custodial parents or other
eligible people can treat the child as a qualifying child for head of household and
EIC.

10. You cannot be a qualifying child of another person.

• You are a qualifying child if you meet the relationship, age, joint return, and residency tests for
that person.
o If you are a qualifying child of another person, you cannot claim the earned income credit
even if the other person does not claim the credit or does not meet all the rules to claim
the credit.
You are not the qualifying child of another taxpayer (and so may qualify to claim the EIC) if the person
for whom you meet the relationship, age, residency, and joint return tests is not required to file an
income tax return and either:

• Does not file an income tax return, or

• Only files to get a refund of income tax withheld or estimated tax paid.

Rules if You Do Not Have a Qualifying Child (Rules 11 through 14)

To claim EIC without a qualifying child, in addition to Rules 1 through 7, above, you must also meet the
following requirements.

11. By the year's end, you must have attained age 25 but not yet reached 65.
a. If married filing a joint return, either you or your spouse must meet the age test.
i. It does not matter which one, if one of you does.
12. You (or your spouse, if filing jointly) cannot be dependent on another person.
a. If you (or your spouse) can be claimed as a dependent on another person’s tax return, you
cannot claim the EIC even if the other person does not claim you as a dependent.

Chapter 8 206 | P a g e
Example: Dan is 17 and single. His parents provide over half of his total support. Dan’s earned income
was $2,875. Because he meets all the dependency tests, his parents can claim him as a dependent on
their tax return. Even if they do not claim him, Dan cannot claim the earned income credit on his tax
return.

13. You cannot be a qualifying child of another person.

a. This is true even if the person for whom you are a qualifying child does not claim the
EIC or meets all the rules to claim the EIC.
b. You are not the qualifying child of another taxpayer (and so may qualify to claim the
EIC) if the person for whom you meet the relationship, age, residency, and joint return
tests is not required to file an income tax return and either:
i. Does not file an income tax return, or
ii. Only files to get a refund of income tax withheld or estimated tax paid.
14. You (and your spouse, if filing jointly) must have lived in the U.S. for more than half the year.

Earned Income Requirement

15. Your earned income must be less than the limits (same amounts as AGI limits per Rule 1, above).

Schedule EIC must be completed if there are any qualifying children, and the credit is claimed on Form
1040.

If your EIC was denied or reduced for any reason other than a mathematical or clerical error, a
completed Form 8862, Information to Claim Earned Income Credit After Disallowance must be attached
to your next return on which EIC is claimed.

• If your EIC was denied or reduced and it was determined that the error was due to reckless or
intentional disregard of the EIC rules, then you cannot claim EIC for the next two years.
• If the error was due to fraud, EIC cannot be claimed for the next ten years.

Some EIC Situations

Example: You, your 5-year-old son Mike, and Mike's father Sam lived together all year. You and Sam
are not married. Mike is a qualifying child of both you and Sam because he meets the relationship, age,
residency, and joint return tests for both of you. Your earned income and AGI are $12,000, and Sam's
earned income and AGI are $14,000. Neither of you had any other income.

Sam agrees to let you treat Mike as a qualifying child. This means if Sam does not claim Mike as a
qualifying child for the EIC or any of the other tax benefits listed earlier, you can claim him as a
qualifying child for the EIC and any of the other tax benefits listed earlier for which you qualify.

If both of you want to claim Mike as a qualifying child, only Sam will be allowed to treat Mike as a
qualifying child, per the tiebreaker rules, i.e., Sam has a higher AGI.

Note: Because both parents lived in the same home with the child, in this scenario only one parent may
use the child for any tax benefits. Tax benefits for the same child may only be split between custodial
and noncustodial parents. If the child lives more than half the year with both parents, the two parents
Chapter 8 207 | P a g e
 may agree to choose which one claims all the benefits for that child. Disputes are settled first by which
parent the child lived with the most nights if the same then they are settled by the parent with the highest
AGI.

Example: You, your husband Bob, and your 10-year-old son Joey lived together until August 1, 2023,
when Bob moved out of the household. In August and September, Joey lived with you. For the rest of
the year, Joey lived with Bob, who is Joey's father. Joey is a qualifying child of both you and Bob
because he lived with each of you for more than half the year and because he met the relationship, age,
and joint return tests for both of you. At the end of the year, you and Bob still were not divorced, legally
separated, or separated under a written separation agreement, so the special rule for divorced or
separated parents (or parents who live apart) does not apply. If you and Bob choose not to file jointly,
you both must file as married filing separately since you did not live apart for the last six months of the
year. There are two possible outcomes:

• If both of you want to claim Joey as a qualifying child, only Bob will be allowed to treat Joey as a
qualifying child, per the tiebreaker rules (i.e., he lived with Joey longer than you did). He is not
filing a joint return and did not live apart from his spouse for the last 6 months of the year, so he
cannot claim the EIC.
• Bob may agree to let you treat Joey as a qualifying child. This means, that if Bob does not claim
Joey as a qualifying child for any of the tax benefits listed earlier, you can claim him as a qualifying
child for any tax benefit listed earlier for which you qualify. However, you are not filing a joint
return and did not live apart from Bob for the last 6 months of the year, so you cannot claim the EIC.

Schedule EIC must be completed if there are any qualifying children, and the credit is claimed on Form
1040.

Example: If your EIC was denied or reduced for any reason other than a mathematical or clerical error,
a completed Form 8862, Information to Claim Earned Income Credit After Disallowance must be
attached to your next return on which EIC is claimed.

• If your EIC was denied or reduced and it was determined that the error was due to reckless or
intentional disregard of the EIC rules, then you cannot claim EIC for the next two years.
• If the error was due to fraud, EIC cannot be claimed for the next ten years.

Summary of EIC Eligibility

All taxpayers eligible for EIC have these things in common:

• Must have earned income.

• Must have a valid SSN.
• In general, cannot file as MFS (subject to certain exceptions)
• Generally, cannot be a nonresident alien.
• Cannot be a qualifying child of another person.
• Cannot be filing Form 2555
• Investment income must be $11,000 or less in 2023.

Chapter 8 208 | P a g e
The four most common errors:

1. Claiming a child who is not a qualifying child.

2. Married taxpayers who incorrectly file as single or head of household.
3. Over or under-reporting income
4. Incorrect SSNs

Claiming the Credit

If eligible, you figure the credit by completing an Earned Income Credit Worksheet.

• Use Worksheet B if filing Schedule C; otherwise, use Worksheet A (below).

• The worksheet says to look up the credit on the Earned Income Credit (EIC) Table in the Form
1040 Instructions.
• The credit is based on your earned income OR your AGI considering certain thresholds.
• You will first determine your total earned income for the year.
• Next, determine your Adjusted Gross Income (AGI) from your tax return.
• Then, compare your AGI to the EIC thresholds (thresholds shown on Part 2, line 5 of Worksheet
A):
o If you have no qualifying children, compare your AGI to the lower threshold.
o If you have one or more qualifying children, compare your AGI to the higher threshold.

• Next, determine the EIC:

o If your AGI is below the threshold, use your earned income to look up the EIC amount in the
EIC Table.
o If your AGI is above the threshold, you need to look up the EIC for both your earned income
and AGI, then use the smaller amount.
• As you learned with the tax tables, read down the left-hand column of the EIC Table to find the
income group that includes your income amount and read across to find the amount of the credit
for the number of qualifying children and your filing status.
o The amount of credit may be different if filing jointly.
• Enter this amount on line 27 of Form 1040.

Schedule EIC must be completed if there are any qualifying children.

Example 1: Walter is single and has one qualifying child. His earned income was $17,270 and his AGI
was $24,355. Using the EIC Table, he finds that the credit based on his earned income of $17,270 and
Chapter 8 209 | P a g e
one child is $3,995 and the credit based on his AGI of $24,355 and one child is $3,545. Walter’s earned
income credit is $3,545, the lower credit amount.

Example 2: Tim (SSN 544-00-3333) and Lorrie (SSN 544-00-2222) Martin have two children, Aggie
(SSN 233-00-6789, born 12/12/2009) and Lon (SSN 233-00-5431, born 8/2/2006). Their filing status is
married filing jointly. Line 1 of their Form 1040 is $23,325. Their only other taxable income is $2,174
of unemployment benefits, giving them an AGI of $25,499. Even though unemployment is NOT earned
income, it is included in their AGI. They must use both the earned income and the AGI to determine
their earned income credit. Tim and Lorrie answered the eligibility questions and found that they can
claim the earned income credit. They completed the worksheet and Schedule EIC as shown on the
following pages.

Chapter 8 210 | P a g e
Chapter 8 211 | P a g e
Chapter 8 212 | P a g e
Chapter 8 213 | P a g e
Chapter 8 214 | P a g e
Schedule EIC, Earned Income Credit (2023)

Chapter 8 215 | P a g e
Key Ideas
• A tax credit is subtracted dollar-for-dollar from the income tax on a return.

Chapter 8 216 | P a g e
 • A nonrefundable credit reduces or eliminates income tax but will not generate an additional
refund.
• A refundable credit reduces or eliminates the total tax and generates a refund of any amount of
the credit above the total tax liability.
• A qualifying child for EIC meets the relationship, age, residency, and joint return tests.
• You need to have earned income to claim the earned income credit. The amount of the earned
income credit is based on filing status and is found in the EIC Table.
• You can elect to include or not include nontaxable combat pay as earned income when
determining the earned income credit.
• Refundable Credits include:
o Earned Income Credit
o Additional Child Tax Credit
o American Opportunity Credit (40% refundable)
• Paid tax preparers should ask sufficient questions to comply with their due diligence
responsibilities.
o Preparers do not have to verify the taxpayer’s ss# with the Social Security
Administration.
• Paid tax preparers must complete form 8867 and are subject to a penalty if they do not exercise
due diligence in determining eligibility for EIC, CTC/ACTC, ODC, AOTC, and HOH.
o Due diligence is important because it prevents errors and potential penalties for both the
taxpayer and the preparer
o Fines are $560 per failure to not exercise Due Diligence
o 8867 copies must be retained for at least three years after the due date of the return, or the
date the return is filed, whichever is later.

Chapter 8 217 | P a g e
 Chapter 8 Classwork Questions

1. Michael and Lisa, who are married and have two qualifying children,
ages 8 and 15. They file a joint tax return. Michael earned wages of
$22,000, and Lisa earned wages of $4,000. Additionally, Lisa received
unemployment compensation of $2,500. They have no other income.
What is their earned income for the earned income credit?
a) $26,000
b) $23,450
c) $20,500
d) $26,500

2. What is Michael and Lisa's Adjusted Gross Income?

a) $23,860
b) $22,700
c) $28,500
d) $32,500

3. What is the primary difference between nonrefundable and refundable

tax credits?
a) Nonrefundable credits can reduce the tax owed to zero, but not
provide a refund, while refundable credits can result in a refund if
they exceed the tax owed
b) Nonrefundable credits can always result in a refund
c) Refundable credits can only reduce the tax owed but not below zero
d) There is no difference between the two

4. What is required to qualify for the Earned Income Credit (EIC)?

a) Having investment income above a certain threshold
b) Earning income from work or self-employment
c) Being over the age of 65
d) Having no dependents

5. What happens if a tax preparer fails to meet due diligence requirements

when claiming credits like the EIC for a client?
a) The preparer may face penalties
 b) The preparer receives a bonus
c) There are no consequences
d) The preparer is promoted

6. When calculating the Earned Income Credit (EIC), what is an essential

factor to consider?
a) The taxpayer's filing status and number of qualifying children
b) The taxpayer's preference for standard or itemized deductions
c) The taxpayer's age and educational background
d) The taxpayer's stock market investments

7. Why is due diligence particularly important for tax preparers when

dealing with refundable credits like the EIC?
a) Because these credits can result in significant refunds, accuracy and
compliance are critical to prevent fraud and errors
b) Because these credits are less scrutinized by the IRS
c) Because refundable credits are less beneficial to taxpayers
d) Because due diligence is only a recommendation, not a requirement

8. Which of the following statements is true about nonrefundable tax

credits?
a) They can be carried forward to the next tax year
b) They can reduce the amount of tax owed to less than zero
c) They can only reduce the tax owed to zero and not provide a refund
d) They are always converted into refundable credits

9. How does the IRS define due diligence for tax preparers regarding the
Earned Income Credit (EIC)?
a) Preparers must ensure the taxpayer understands their tax
responsibilities
b) Preparers must verify all information on the tax return without
taxpayer input
c) Preparers are not required to ask for documentation to verify
information
d) Preparers must ask for necessary documentation and verify the
accuracy of the tax return information
10.Which of the following is an example of a refundable tax credit?
a) Lifetime Learning Credit
b) Foreign Tax Credit
c) Earned Income Credit (EIC)
d) Adoption Credit
 Chapter 8 Homework

CH8: HOMEWORK 1

1. Ross (age 34) and Ashley (age 32) were married and lived together until June,
when they divorced. They have one child, Brooks (age 2). Brooks lived with
both parents until June, and then lived with his mother. Ross’ earned income
and AGI are $75,225. He also paid $7,000 in child support. Ashley’s earned
income is $27,500 and her AGI is $19,485. Who can claim the earned income
credit and what amount of credit?
a. Ross can claim an earned income credit of $2,935.
b. Ross can claim an earned income credit of $3,733.
c. Ashley can claim an earned income credit of $3,042.
d. Ashley can claim an earned income credit of $3,995.
e. None of these
2. What is the maximum age a taxpayer with no qualifying children may be at
the end of the year and still qualify for the earned income credit?
a. Age 25
b. Age 64
c. Age 65
d. Age 70½
e. None of these

Calculate the Earned Income Credit to be reported on the Jones’ income tax return using
the
following information:

3. Janice and Cliff Jones are married, filed a joint return last year, and will do so
again this year. They have three (3) children, ages 4, 12, and 15. Cliff had W-2
wages of $75,180 and Janice had W-2 wages of $20,870. Their joint AGI was
$96,050.
Determine the Jones; Earned Income Credit.

4. To meet the relationship test for EIC, the child must be?
5. Assuming eligibility and no special rule for divorced or separated
parents apply, only one person can use a qualifying child to claim tax benefits.
List those five benefits.
 ____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________

CH8: HOMEWORK 2-forms

Read the following scenario carefully. Answer the questions provided at the end of the
scenario.
Then, prepare Sarah’s tax return, following the tasks listed at the end of this assignment.
Sarah T. Johnson (SSN 473-00-3211, born 7/18/1982) and Chris R. Johnson (SSN
482-00-3564, born 12/12/1973) are married but they have not lived together since
June, when Chris moved out of the family home. They will not file a joint return. Sarah
and their daughter Bethany (SSN 224-00-4569, born 9/25/2011) lived at 1550 Tiger
Drive, Suffolk, VA. 23434, and Sarah provided more than half of Bethany’s support.
No one else lives in the home. Sarah signed Form 8332 which allows Chris to claim
Bethany.

Sarah does not receive any child support, federal or state assistance, or any social security. At
Bethany’s school, Sarah is listed as the contact person in case of an emergency and she and
Chris are

responsible for all of Bethany’s medical and dental bills. Chris and Sarah filed a joint
return last year and did not itemize their deductions.
 1. What is Sarah’s filing status?
2. Who can claim Bethany as a dependent?
3. Who can claim the Earned Income Credit for Bethany?

Task 1: Complete Sarah’s Form 1040 through line 16 on page 2.

Task 2: Complete the Line 27-Earned Income Credit (EIC) worksheet A
Task 3: Complete Schedule EIC.
Task 4: Complete the rest of Form 1040 (IGNORE ANY CHILD TAX
CREDIT – WE WILL DISCUSS THAT IN THE NEXT CHAPTER).
Reminder: Paid tax preparers must also complete Form 8867 for any return
they prepare that has EIC, CTC/ACTC, ODC, AOTC, or HOH.

Task 1
Task 2
Task 3
Task 4