5.   Credits

This chapter briefly discusses the credit for the elderly or disabled, the child and dependent care credit, and the earned income credit. You may be able to reduce your federal income tax by claiming one or more of these credits.

Credit for the Elderly or the Disabled

This section explains who qualifies for the credit for the elderly or the disabled and how to figure this credit. For more information, see Publication 524, Credit for the Elderly or the Disabled.

You can take the credit only if you file Form 1040 or Form 1040A. You cannot take the credit if you file Form 1040EZ or Form 1040NR.

Can You Take the Credit?

You can take the credit for the elderly or the disabled if you meet both of the following requirements.

  • You are a qualified individual.

  • Your income is not more than certain limits.

 
You can use Figure 5-A and Figure 5-B as guides to see if you are eligible for the credit. 

Qualified Individual

You are a qualified individual for this credit if you are a U.S. citizen or resident alien, and either of the following applies.

  1. You were age 65 or older at the end of 2013.

  2. You were under age 65 at the end of 2013 and all three of the following statements are true.

    1. You retired on permanent and total disability (explained later).

    2. You received taxable disability income for 2013.

    3. On January 1, 2013, you had not reached mandatory retirement age (defined later under Disability income ).

Age 65. You are considered to be age 65 on the day before your 65th birthday. Therefore, you are considered to be age 65 at the end of 2013 if you were born before January 2, 1949.

Figure 5-A. Are You a Qualified Individual?

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Figure 5-A, Are you a qualified individual?

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 income.

  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 a joint return 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 certain tests. See Publication 524 and Publication 501.

Under age 65.   If you are under age 65 at the end of 2013, you can qualify for the credit only if you are retired on permanent and total disability and have taxable disability income (discussed later under Disability income ). You are considered to be under age 65 at the end of 2013 if you were born after January 1, 1949. You are retired on permanent and total disability if:
  • You were permanently and totally disabled when you retired, and

  • You retired on disability before the end of the tax year.

  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.

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 the 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.

  

Figure 5-B. Income Limits

IF your filing status is... THEN even if you qualify (see Figure 5-A), you CANNOT take the credit if:
Your adjusted gross income (AGI)* is equal to or more than... OR the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income is equal to or more than...
single, head of household, or qualifying widow(er) with dependent child $17,500 $5,000
married filing jointly and only one spouse qualifies in Figure 5-A $20,000 $5,000
married filing jointly and both spouses qualify in Figure 5-A $25,000 $7,500
married filing separately and you lived apart from your spouse for all of 2013 $12,500 $3,750
*AGI is the amount on Form 1040A, line 22, or Form 1040, line 38

  

  The fact that you have not worked for some time is not, of itself, conclusive evidence that you cannot 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 do not have to file this statement with your tax return, but you must keep it for your records. The Instructions for Schedule R (Form 1040A or 1040) include a statement your physician can complete and that you can keep 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 2013, you may not need to get another physician's statement for 2013. For a detailed explanation of the conditions you must meet, see the instructions for Schedule R (Form 1040A or 1040), Part II. If you meet the required conditions, you must check the box on Schedule R (Form 1040A or 1040), Part II, line 2.

  If you checked Schedule R (Form 1040A or 1040), Part I, box 4, 5, or 6, print in the space above the box in Part II, line 2, 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 the following two requirements.
  • It must be paid under your employer's accident or health plan or pension plan.

  • It must be included in your income as wages (or payments in lieu of wages) for the time you are absent from work because of permanent and total disability.

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.

Figuring the Credit

You can figure the credit yourself, or the IRS will figure it for you.

Figuring the credit yourself.   If you figure the credit yourself, fill out the front of Schedule R (Form 1040A or 1040). Next, fill out Schedule R (Form 1040A or 1040), Part III.

Credit figured for you.   If you can take the credit and you want the IRS to figure the credit for you, see Publication 524 or the Instructions for Schedule R (Form 1040A or 1040). If you want the IRS to figure your tax, see chapter 30 of Publication 17, Your Federal Income Tax.

Child and Dependent Care Credit

You may be able to claim this 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.

If you claim this credit, you must include on your return the name and taxpayer identification number (generally the social security number) of each qualifying person for whom care is provided. If the correct information is not shown, the credit may be reduced or disallowed.

You also must show on your return the name, address, and the taxpayer identification number of the person(s) or organization(s) that provided the care.

For more information, see Publication 503, Child and Dependent Care Expenses.

Earned Income Credit (EIC)

The earned income credit (EIC) is a refundable tax credit for certain people who work and have earned income under $51,567. The EIC is available to persons with or without a qualifying child.

Credit has no effect on certain welfare benefits.   Any refund you receive because of the EIC cannot be counted as income when determining whether you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. These programs include the following.
  • Medicaid and supplemental security income (SSI).

  • Supplemental Nutrition Assistance Program (food stamps).

  • Low-income housing.

  • Temporary Assistance for Needy Families (TANF).

 
In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. Check with your local benefit coordinator to find out if your refund will affect your benefits.

Do You Qualify for the Earned Income Credit (EIC)?

Use Table 5-1 as an initial guide to the rules you must meet in order to qualify for the EIC. The specific rules you must meet depend on whether you have a qualifying child.

  • If you have a qualifying child, the rules in Parts A, B, and D apply to you.

  • If you do not have a qualifying child, the rules in Parts A, C, and D apply to you.

 
If, after reading all the rules in each part that applies to you, you think you may qualify for the credit, see Publication 596, Earned Income Credit, for more details about the EIC. You can also find information about the EIC in the instructions for Form 1040 (line 64a), Form 1040A (line 38a), or Form 1040EZ (line 8a).

The sections that follow provide additional information for some of the rules.

Adjusted gross income (AGI).   Under Rule 1, you cannot claim the EIC unless your AGI is less than the applicable limit shown in Part A of Table 5-1. Your AGI is the amount on line 37 (Form 1040), line 21 (Form 1040A), or line 4 (Form 1040EZ).

Table 5-1. Earned Income Credit (EIC) in a Nutshell

First, you must meet all the rules in this column. Second, you must meet all the rules in one of these columns, whichever applies. Third, you must meet the rule in this column.
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. 
Figuring and Claiming the EIC
1. Your adjusted gross income (AGI) must be less than: 
•$46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, 
•$43,038 ($48,378 for married filing jointly) if you have two qualifying children, 
•$37,870 ($43,210 for married filing jointly) if you have one qualifying child, or  
•$14,340 ($19,680 for married filing jointly) if you do not have a qualifying child.
2. You must have a valid social security number.  
3. Your filing status cannot be “Married filing separately.” 
4. You must be a U.S. citizen or resident alien all year.  
5. You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). 
6. Your investment income must be $3,300 or less.  
7. You must have earned income.
8. Your child must meet the relationship, age, residency, and joint return tests.  
9. Your qualifying child cannot be used by more than one person to claim the EIC.  
10. You generally cannot be a qualifying child of another person.
11. You must be at least age 25 but under age 65.  
12. You cannot be the dependent of another person.  
13. You generally cannot be a qualifying child of another person. 
14. You must have lived in the United States more than half of the year.
15. Your earned income must be less than: 
•$46,227 ($51,567 for married filing jointly) if you have three or more qualifying children, 
•$43,038 ($48,378 for married filing jointly) if you have two qualifying children, 
•$37,870 ($43,210 for married filing jointly) if you have one qualifying child, or 
•$14,340 ($19,680 for married filing jointly) if you do not have a qualifying child.

Social security number.   Under Rule 2, you (and your spouse if you are married filing jointly) must have a valid social security number (SSN) issued by the Social Security Administration (SSA). Any qualifying child listed on Schedule EIC also must have a valid SSN. (See Qualifying child , later, if you have a qualifying child.)

  If your social security card (or your spouse's if you are married filing jointly) 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.

Investment income.   Under Rule 6, you cannot claim the EIC unless your investment income is $3,300 or less. If your investment income is more than $3,300, you cannot claim the credit. For most people, investment income is the total of the following amounts.
  • Taxable interest (line 8a of Form 1040 or 1040A).

  • Tax-exempt interest (line 8b of Form 1040 or 1040A).

  • Dividend income (line 9a of Form 1040 or 1040A).

  • Capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form 1040A).

 
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.

  For more information about investment income, see Publication 596, Earned Income Credit.

Earned income.   Under Rule 7, you must have earned income to claim the EIC. Under Rule 15, you cannot claim the EIC unless your earned income is less than the applicable limit shown in Table 5-1, Part D. Earned income includes all of the following types of income.
  1. Wages, salaries, tips, and other taxable employee pay. 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.

  2. Net earnings from self-employment.

  3. Gross income received as a statutory employee.

Gross income defined.   Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate tax return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b to figure the taxable part of social security benefits you must include in gross income.

Self-employed persons.   If you are self-employed and your net earnings are $400 or more, be sure to correctly fill out Schedule SE (Form 1040), Self-Employment Tax, and pay the proper amount of self-employment tax. If you do not, you may not get all the credit to which you are entitled.

Disability benefits.   If you retired on disability, taxable 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. Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income.

  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 under Rule 7 include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits — except for payments covered under Disability benefits earlier), 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.

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.

Qualifying child.   Under Rule 8, your child is a qualifying child if your child meets four tests. The four tests are:
  1. Relationship,

  2. Age,

  3. Residency, and

  4. Joint return.

  The four tests are illustrated in Figure 5-C. See Publication 596 for more information about each test.

Figure 5-C. Tests for Qualifying Child

A qualifying child for the EIC 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)
1
was ...
Under age 19 at the end of 2013 and younger than you (or your spouse if filing jointly)
OR
Under age 24 at the end of 2013, a student, and younger than you (or your spouse if filing jointly)
OR
Permanently and totally disabled at any time during the year, regardless of age
1
who...
Is not filing a joint return for 2013  
(or is filing a joint return for 2013 only as a claim for refund of income tax withheld or estimated tax paid)
1
who...
Lived with you in the United States for more than half 
of 2013. 
If the child did not live with you for the 
required time, see Publication 596 for more information.

Figuring the EIC

To figure the amount of your credit, you have two choices.

  1. Have the IRS figure the EIC for you. If you want to do this, see IRS Will Figure the EIC for You in Publication 596.

  2. Figure the EIC yourself. If you want to do this, see How To Figure the EIC Yourself in Publication 596.


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