# Presentation: 415126

## Lesson 5 
Earned Income Credit
 (EIC)

**Earned Income Credit**
** ****(EIC)**

**Notes:**
This lesson contains information for all courses and has been updated for Tax Year 2007.

This lesson will use a lot of what you have already learned about filing status, exemptions, etc. 
The definition of a qualifying child comes into play on several different levels.
This chapter will help you determine if the taxpayer is entitled to claim the Earned Income Credit and how to calculate it.

Progress to the next slide.

## Objectives

- Determine which taxpayer may be eligible for the EIC using Publication 4012 and Form 13614
- Determine if a taxpayer has a qualifying child for the EIC
- Calculate the credit using the EIC worksheets
- Request advance payment of the EIC in a paycheck
- Report AEIC on a tax return

**Notes:**
Review the objectives with the class.
Explain that the EIC is a refundable credit.  An eligible taxpayer can receive a refund even if they owe no tax and had no income withheld.
Introduce the requirements for claiming EIC.
Point out the general requirements to the class.
Give the class the maximum EIC for 2007 on page 2 in the text.
Stress to the class:  the IRS wants all eligible taxpayers to receive the EIC.  Their goal is a fair and balanced EIC program—one that clearly encourages eligible taxpayers to apply while reducing an unacceptably high rate of erroneous. claims
Caution: For paper returns, incorrectly calculated EIC is a common error. The worksheets become very important when figuring the credit without the aid of a computer. 
Progress to the next slide.

## Intake/Interview Process

**Intake/Interview Process**

- Form 13614 – Intake and Interview Sheet
-                      Credits Section

**Notes:**
This is the portion of the form the taxpayer may have filled out.

Use the tools you are provided (Pub 4012 and Form 13614) to let the taxpayer help you reach the right conclusion.
Confirm their answers to questions on Form 13614 Intake/Interview Sheet. 
Use the charts in Pub 4012 not only to make the determination yourself but for interaction with the taxpayer. If items are incorrect or incomplete, revisit the issue and make corrections to the intake sheet  because the Quality Reviewer needs to determine that a correct return was prepared based on the information given and verified.
The Intake/Interview sheet does not have a specific section for the Earned Income Credit on the front page but see the next slide for more information.

Progress to next slide.

## Intake/Interview Process (cont’d)

**Intake/Interview Process ****(cont’d)**

- Form 13614 – Page 2- Part VIII

**Notes:**
This is the portion of the intake sheet you (the volunteer) are responsible for.
Notate any corrections on the section prepared by the taxpayer. 

Progress to next slide.

## General Eligibility Rules

- Must file a tax return
- Must have earned income
- Must not exceed maximum limits
- Must have valid SSN
- Must not use MFS filing status
- Must be a US citizen or resident alien

**Notes:**
Discuss each rule with the class
Review the maximum earned and adjusted gross income limits for 2007.

Progress to next slide.

## General Eligibility cont’d.

- Must not file form 2555
- Must not exceed investment income limit
- Must not qualify another taxpayer for EIC

**Notes:**
Continue review.
Investment income will be discussed in detail later but more than $2,900 will disallow EIC.
Review Example 2 in the student text.

Progress to next slide.

## Investment Income

- Defined:
**Interest, dividends, capital gains, rental income, royalties, etc.**
**Also considered** **unearned income**
- Limit:
**In 2007 more than $2,900 in unearned income will disallow the credit.**

**Notes:**
Give students the maximum investment income limit for 2007.
Caution – do not omit any type of income when figuring the credit.

Progress to next slide.

## Earned Income

- Usually W-2 or Self Employment income.
- Exceptions:
- Household employee may not be issued W-2 if income is low enough
- Inmate may receive a W-2 but not be able to include it.
- Military personnel can choose not to include combat pay.
- Disability benefits may or may not count

**Notes:**

Household income doesn’t  require a W-2 if under $1,500
Military personnel can choose to exclude combat pay from earned income if it is more advantageous.
They must, however, include or exclude it all.
Explain that both spouses can choose differently
Discuss Disability Benefits – if you are young enough to still be in the work force you can call it earned income, if not you cannot call the benefits earned income.
Review Example 3.

Progress to next page.

## General Rules With Qualifying Children

**Must meet all 3 tests**
**Relationship Test**
**Age Test **
**Residency Test**

**Notes:**
Discuss the general rules for claiming the EIC with a qualifying child and review the table in Publication 4012, Tab H.
Refer the class to the table on page 5-7 in the student text.
Remind students that the EIC could be as much as $2,853 with one qualifying child and $4,716 with 2 or more qualifying children. 

Discuss the following points as a review for the class since this has all been discussed previously:
Ask the class who a relative might not include.  (A relative does not include cousins or the neighbor’s child, etc.)
Ask the students about the age test since it has previously been discussed.  (Is it 13, 17, 19, 24)
What does residency mean?  (Residency could even mean a homeless shelter)

Progress to next slide.

## Qualifying Child

- After the first three tests are met the most complicated one is:
-   **You cannot be a qualifying child**

**Notes:**
Have the students imagine themselves as the qualifying child and review the examples.
Usually, your parents, grandparents, an older sibling, aunt or uncle  can claim you for EIC as long as you lived in their home more than six months, were either under 19 or under 24 and a full time student (See Pub 17 for clarification) or disabled.  Whether someone claimed you or not, you are not entitled to EIC on your return.
If you are 20 and a full time student and marry in the last half of the year and lived with your parents more than half of the year – you are not entitled to the credit on your return.
If you lived at home until you marry and are the age discussed above, you and your new spouse may not be entitled to EIC unless you or your new spouse has a filing requirement.
Refer often to the Interview Tips provided in Pub. 4012 behind Tab H.

Progress to next slide.

## Qualifying Child cont’d.

- Eligible foster child
- Adopted child
- Permanently and totally disabled
- Child who was kidnapped

**Notes:**

Discuss the definitions above.

Progress to next slide.

## Qualifying Child of More Than One Taxpayer

- If the rules for Divorced or Separated Parents apply:
** ****The custodial parent has the potential for EIC**
**If the parents were not married or if the child lives with parent and grandparent, or with both parents:**
**The tie-breaker rules apply**

**Notes:**
Emphasize to students that the custodial parent can still qualify for all other benefits relating to a qualifying child even if they allow the non-custodial parent to claim the dependency exemption and child tax credit.
Discuss Form 8332, when it is needed, and that it is the final determination in a Divorced or Separated Parents situation.
Review the tie-breaker rules in Publication 4012, Tab H.
Review Example 4, 5 and 6 in the student text.

Progress to next slide.

## Who Can Claim the EIC Without a Child 

- Lived in the United States more than half the tax year
- At least 25 but under age 65 on Dec. 31
- Does not qualify as the dependent of another person

**Notes:**

Explain the income limitations of $12,590 or $14,590 for married filing joint.
Explain the Maximum credit is $428.
Clarify what it takes to meet the age requirements and that only one spouse if married filing joint has to meet it.
Give students a few statistics such as the number of errors during the early filing season last year: 49,147 paper tax returns were disallowed EIC because the taxpayer’s age was not right.
TaxWise requires a birth date for all taxpayers and dependents on any return.  This date and Social Security Number and name are matched through the Social Security Admin.  TaxWise therefore does not allow this error.
Complete Exercise 1

Progress to next slide.

## EITC Tips

- Just because you have a child you may **not** be entitled to claim the following:
- EIC
- Dependency Exemption
- Child Tax Credit
- Child Dependent Care Credit
- Head of Household Filing Status
- Any guesses why?

**Notes:**
Review these tips again before completing Exercise 1
You must be able to claim the child as a dependent (unless you gave the non-custodial parent Form 8332) and reside in the home where the child lived with you for more than half the year.
And potentially pass the tie-breaker rules.
Dependency Exemption
You still have to pay more than half the child’s total support
The child can not have earnings of more than the exemption amount unless he or she is under 19 or under 24 and a full time student, and 
The child has to be a citizen and not file a joint return, etc., etc., etc.
Child Tax Credit
This credit is tied directly to the dependency exemption but the child must also be the right age – under 17.
Child Dependent Care Credit
The child still has to be under 13 at time of payment or disabled.
The fees have to be paid for you (and a spouse if joint return) to be gainfully employed or looking for work.
Must be paid to the right persons for the right reasons.  No family member who is a dependent, no overnight summer camps for other reasons, etc. 
Head of Household filing status
You still have to provide more than half the cost of keeping up a home for a qualifying child.
Complete Exercises 2 and 3 using the rules for a qualifying child as discussed earlier. This is good test preparation.

Progress to next slide.

## EIC Worksheets

- TaxWise Worksheet
- Paper Return Worksheets
- EIC Table

**Notes:**
Explain to students that EIC worksheets must be attached to the tax return.  When preparing the worksheets it is imperative that you speak aloud to the taxpayer and not assume anything.  Even though you may have asked it before, just repeat the answer you are entering.
Tell students that TaxWise provides you with a worksheet if all other entries are made and there is still an indication that there might be a question about the EIC.  Such as:
The birth-date of the dependent – if the child is over 19 it gives you more questions to answer
Explain that Form 1040 and 1040-A have almost identical worksheets.  Form 1040-EZ basically tells you how to look up the amount because it is based on age and income.
Tell students that the worksheets are very thorough flow charts that are very helpful when filing a return.  Especially a paper return.
Suggested probing questions for the class:
Ask if anyone knows why Form 1040-EZ doesn’t have a lengthy worksheet for a qualifying child.
The answer would be – no dependents are allowed on 1040-EZ.
Review the EIC Table and Example 7 which provide the completed sheets in Exhibits 1-5 
Have the students complete Exercise 4.
Review the exercise.
Review Example 8 and Exhibit 11.

Progress to next slide.

## Schedule EIC for Qualifying Child(ren) 

- Reporting Qualifying Child Information

**Notes:**
Discuss when Schedule EIC is required.
Let students know that Schedule EIC must be attached to the taxpayer’s Form 1040A and 1040 when they file the return with the IRS. 
Review Example 8 and discuss. 
Have the students complete Exercise 5 – Schedule EIC.  
Review the exercise.
Caution the students that the EIC is not for everyone. Only those taxpayers who are eligible should claim the credit. It is important to understand the eligibility requirements and claim the EIC on the returns of only those taxpayers who qualify for it.

 Progress to next slide.

## EIC – General Information 

- EIC – Eligibility Tools
- Common EIC Return Errors
- Disallowed Earned Income Credit
- Advance Earned Income Credit Payments (AEIC)

**Notes:**
Ensure that students know that EIC is not for everyone; the taxpayer must qualify for the credit.
List some of the most common reasons for disallowance are:
Claiming the credit with a child who is not the taxpayer’s qualifying child.
Married taxpayers filing as single or head of household.
Reporting income incorrectly.
Missing or incorrect social security numbers.  An incorrect number more often than not means the name does not match the number.  (With so many mixed families and second marriages today, sometimes the children of first marriages blend right in.  Even school and medical records show incorrect last names to match everybody else in the family.  If a child’s social security card has not been corrected to reflect the change, the return will reject.)
Take Credit (online tool), Publication 4012, the EIC worksheets and Publication 596, are all excellent tools when assisting taxpayers in claiming the EIC. 
Complete the revised Exercise 4 – Advance EIC and review. 

Progress to next slide.

## Quality Review (QR)

- Form 8158 – Quality Review Sheet
- Adjustments, Deductions, and Credits Section

**Notes:**
To the Volunteer:
The intake sheet, supporting documentation and any notations you made on the intake sheet should be sufficient for a third party to clearly see how you reached your decisions.  You may have to do the review yourself but if someone who was not a party to the earlier conversations you had with the taxpayer looked at the source documents, that person should reach the same conclusion you did.  
Use the Form 8158, Quality Review Sheet or your site’s approved equivalent to review all returns prepared.  

To the Quality Reviewer:
Apply the QR tools in combination with the Interview/Intake Sheet and all the source documents to the returns you prepare to assure quality and accuracy for every taxpayer. Consider each box on the Quality Review Sheet which applies to your taxpayer’s situation to confirm that all the necessary questions and issues have been addressed.   If items are incorrect or incomplete, revisit the issue and make corrections to the return, as needed.
Ensure accurate reporting of adjustments, deductions, and credits, verify that the information on the Intake/Interview Sheet and on the taxpayer’s supporting documents is included on the return.
Verify that the EITC was not previously disallowed and the taxpayer is eligible for the credit.
Confirm that all potential adjustments, deductions, and credits have been discussed with the taxpayer and shown on the return, if applicable.

 Progress to next slide.

## Lesson Summary

- General EIC Requirements
-   & Eligibility Rules
- Schedule EIC
- Common EIC Return Errors
- Disallowed EIC
- Advance EIC Payments

**Notes:**
Review the Summing Up This Lesson section with the students.
Ask if there are any questions.

 EIC Errors accumulated:
Personal exemption not allowed SSN name mismatch – 1,583
Dependents were disallowed – 26,544
Disallowed because Form 8862 (EIC was disallowed the year before and form is required) was not attached – 5,520
Incorrectly figured– 4,176 ( would have been paper returns).
Wrong Age – EIC disallowed – 1,791 on 1040 A, 3,246 on 1040 EZ, 6,762 on 1040 ( this would have been paper also.
Complete Exercise 6 and review.

Progress to next slide.

## EIC Eligibility Requirements - Summary

- Rules for Everyone
- Rules If You Have a Qualifying Child
- Rules If You Do Not Have a Qualifying Child
- Earned Income and AGI Limitations

**Notes:**
Review the Summary of Eligibility Requirements table in Publication 4012, Volunteer Resource Guide, Tab H.
 Part A – Rules for Everyone
 Part B – Rules If You Have a Qualifying Child
 Part C – Rules If You Do Not Have a Qualifying Child
 Part D – Earned Income and AGI Limitations
Ask if the students have questions
Propose a few questions that require use of the tables.   

Progress to the next Lesson.