Financial Eligibility Requirements  (For Tax Year 2009)

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Rules D1, D2, and D3 explain Earned Income Credit eligibility requirements that have to do with limits on certain types of income you receive.

Rule D1: Any investment income that you might have (in the form of taxable or tax-exempt interest, dividends, and capital gains) must be less than $3,100 (for tax year 2009). (Note: This is a test of income received from investments, not a test of the total assets you own.)

• Interest includes money earned from keeping your cash assets in a bank account, money market fund, or bond fund, etc.

• Dividends are payments received from ownership of stock in a company.

• Capital gains represent the profit (Sale price - Purchase price) received from the sale of such assets as stocks, bonds, real estate, coins, etc.

Note: It is important to recognize that this rule is a test of income received from assets such as cash, stocks, etc., and is not a test of the total amount of assets you own. For example, if you had $10,000 in savings in a money market fund or bank savings account that paid you $400 in interest in a year, you would still be eligible for the EIC under this rule because your income from investments (or savings) is under $3,100. Even if you own a house worth $200,000, but had investment income less than $3,100, you could still be eligible to claim the EIC, provided you meet the other requirements.

Rule D2: Your total earned income (for tax year 2009) must be less than the following:

• $43,279* if you have three or more qualifying children,
• $40,295* if you have two or more qualifying children,
• $35,463* if you have one qualifying child, or
• $13,440* if you do not have a qualifying child.

*These limits are $5,000 higher (i.e., $48,279, $45,295, $40,463, and $18,440 respectively) for married couples filing a joint tax return.

There are two categories of earned income: taxable and nontaxable. Both must be considered when counting your total earned income to determine if you are under the total earned income limits in order to qualify for the EIC. Stated another way:

Total earned income = (Taxable earned income) + (Nontaxable earned income)

Taxable Earned Income includes the following:

• Wage/Salary from your job(s)
• Tips
• Net earnings from self-employment (what you keep after your costs)
• Union strike benefits
• Long-term disability benefits received before minimum retirement age

Whereas, Nontaxable Earned Income includes the following:

• Housing allowances for military personnel or members of the clergy
• Meals and lodging provided by your employer for the benefit of your employer
• Certain educational assistance benefits

Rule D3: Your adjusted gross income (AGI) (for tax year 2009) must be less than the following:

• $43,279* if you have three or more qualifying children,
• $40,295* if you have two or more qualifying children,
• $35,463* if you have one qualifying child, or
• $13,440* if you do not have a qualifying child.

*These limits are $5,000 higher (i.e., $48,279, $45,295, $40,463, and $18,440 respectively) for married couples filing a joint tax return.

Adjusted gross income can be understood as follows:

Adjusted gross income = (Earned income) + (Income from other sources) - (Certain deductions)

• Earned income = Money you earned from working (i.e., wages, salaries, tips). Expressed another way:

  Earned income = (Wages) + (Salaries) + (Tips)

• Gross income = Your earned income plus income from other sources such as interest, dividends, capital gains, and taxable Social Security benefits. Put another way:

  Gross income = (Earned Income) + (Income from other sources)

• Adjusted gross income = Your gross income minus certain deductions such as money used to contribute to an Individual Retirement Account (IRA), interest paid on a student loan, and paid alimony. Put another way:

  Adjusted gross income = (Gross income) - (Certain deductions)

Note: Deductions such as contributions to an IRA account or paid alimony reduce your adjusted gross income. In many cases, this may entitle you to receive more, not less EIC.