I.R.C. § 32 provides the statutory rules for the EIC. The easiest way to understand all the EIC rules is to consult Chapters 1 to 3 of IRS Publication 596, which allows you to quickly assess your client’s EIC eligibility.

This publication cogently groups the various EIC rules into 3 sets:

• Rules for Everyone
• Rules If You Have a Qualifying Child
• Rules If You Do Not Have a Qualifying Child

Chapter 4 explains the income limits for the EIC.

The basic rules for the EIC are income limits, earned income, ineligibility of persons who legally must file as “married filing separately”, and the relationship, age, and residency tests for any qualifying child. A low-wage worker can receive an EIC refund even if there is no dependent, but most of the issues confronted by the tax attorney will involve the claiming of dependents and whether the dependent is a qualifying child or relative for EIC purposes.

For each tax year, there will be AGI limits for the EIC by family size and filing status.

Historically, the AGI limits have increased each year. In 2021, the AGI limits will range from $48,000 to $57,000 for married couples with children. Look to the Form 1040 instructions for the current AGI limits.

Earned income includes wages, salaries, tips, and other employee compensation (but only if these are includible in gross income)1  plus net earnings from self-employment.2  Earned income may also include an employer’s disability retirement plan benefits until the worker reaches minimum retirement age.

Earned income does not include pensions, annuities, unemployment compensation, social security, welfare, alimony, child support, inmate compensation, nontaxable workfare payments, and scholarship or fellowship grants not reported on a Form W-2.

If a married couple in a community property state such as Louisiana has been separated for more than 6 months and is separated at the end of the year, one spouse may elect to file a separate return as a “Head of Household” and use their own earned income to qualify for the EIC.

Proof of “earned income such as W-2 or 1099 Forms may be required by the IRS. Self-employed individuals should have records of their income, such as check stubs, bank statements showing deposits, or other business records.

• 1Prior to 2002, earned income included nontaxable earned income, e.g., voluntary salary reductions, 401(k) contributions, mandatory contributions to a state or local retirement plan, etc.
• 2Compensation paid by a third party for damages due to lost self-employment income will not constitute “earned income” for the purposes of the EIC.

Taxpayers who are married on December 31 of the tax year and who cannot file as “married filing jointly” face special problems. These taxpayers will not qualify for the EIC unless they meet the requirements for head-of-household filing status.1

If a married taxpayer did not live with the spouse at any time in the last 6 months of the year, the taxpayer may be able to file as the head of household if the taxpayer furnished more than half of the cost of maintaining the household.2  Unmarried taxpayers do not have to be the head of household in order to get the EIC.

Many EIC errors involve married taxpayers who could not legally file as single or head -of-household. If a taxpayer was married on December 31 of the tax year, review the taxpayer’s proof of separate residences and the 50% support test for head-of-household filing status.

If married taxpayers incorrectly filed as head-of-household or single, they may be able to file an amended tax return to get the allowable EIC for their income level. However, they are precluded from filing a joint return after a Notice of Deficiency has been issued and a Tax Court petition filed.3  Therefore, a joint return claiming an EIC should be filed before either spouse files a Tax Court petition if this is a feasible option.

• 1I.R.C. § 32(d); Mischel v. Comm’r, T.C. Memo 1996-553.
• 2I.R.C. §§ 2(b)(1), 7703(b).
• 3See, e.g., I.R.C. § 6013(b)(2); Pelayo-Zabalza v. Comm’r, T.C. Summ. Op. 2002-134; Benitez v. Comm’r, T.C. Summ. Op. 2002-12.