Drake Tax – EIC: Frequently Asked Questions

Earned income for EIC purposes includes:

• Wages, salaries, tips, and other taxable employee pay. Employee pay is earned income only if it is taxable.

• Net earnings from self-employment.

• Gross income received as a statutory employee.

• Strike benefits.

• Amounts received for performing ministerial duties as an employee.

• Disability benefits received under an employer’s disability retirement plan until you reach minimum retirement age.

Earned income for EIC purposes does not include:

• Interest and dividends.

• Pensions and annuities.

• Social Security and railroad retirement benefits.

• Workers’ compensation benefits.

• Alimony and child support.

• Welfare benefits.

• Unemployment compensation.

• Nontaxable foster care payments.

• Veterans’ benefits, including VA rehabilitation payments.

• Certain dependent care benefits.

• Certain adoption benefits.

• Earnings while an inmate.

• Workfare payments.

For more information, refer to Publication 596 and Publication 3524.

EIC rules include four levels of income limits based on the number of qualifying children: no qualifying children, one qualifying child, two qualifying children, and 3 or more qualifying children. Since the fourth level only requires 3 or more qualifying children, there is no need to report more than three children for EIC purposes.

The IRS provides places for only Child 1, Child 2, and Child 3 on Schedule EIC, consistent with IRS Publication 596. Accordingly, screen DD1 provides entry fields for three children.

For more information, refer to Publication 596 and Publication 3524.

Note that the preparer must answer all questions on the EIC (8867) screen, and on screen 2 for dependents. Form 8867, Paid Preparer’s Earned Income Credit Checklist, is submitted with the return.

Rules for All Taxpayers

• The taxpayer’s AGI must fall below these limits:

• The exact amount of EIC is determined by the filing status, AGI, and number of qualifying children shown in the EIC tables.

• The taxpayer must have a valid social security number.

• The taxpayer’s filing status cannot be MFS (Married Filing Separately).

• The taxpayer must be a U.S. Citizen or resident alien all year.

• The taxpayer’s return cannot include Form 2555.

• The taxpayer must have earned income (if MFJ, at least one taxpayer). The taxpayer can elect to include nontaxable combat pay (see Publication 3, Armed Forces’ Tax Guide) in earned income for the earned income credit.

• The taxpayer’s investment income cannot exceed:

• Max Credit Amounts:

Additional Rules for a Taxpayer with a Qualifying Child

The child must meet the relationship, age, residency, and joint return tests. Among other things,

• the child must be either:

  • under age 19 at the end of the filing year and younger than you (or your spouse, if filing jointly);

  • under age 24 at the end of the filing year, a student, and younger than you (or your spouse, if filing jointly), or

  • permanently and totally disabled at any time during the filing year, regardless of age.

• the child must be the taxpayer’s:

  • son, daughter, stepchild, foster child, or a descendant of any of them (for example, a grandchild), or

  • brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, a niece or nephew).

• A qualifying child cannot be used by more than one person to claim the EIC.

• The taxpayer cannot be a qualifying child of another taxpayer.

Additional Rules for a Taxpayer without a Qualifying Child

The taxpayer:

• Must be at least age 25, but under age 65 at the end of the filing year (if MFJ, at least one taxpayer).

• Cannot be the dependent of another person.

• Cannot be a qualifying child of another taxpayer.

• Must have lived in the United States more than half of the year.

For more information, refer to Publication 596 and Publication 3524.

When a child meets the tests to be a qualifying child of more than one person, the tiebreaker rules determine who may be able to claim the qualifying child with respect to:

• The exemption for the child.

• The child tax credit.

• Head of household filing status.

• The credit for child and dependent care expenses.

• The exclusion for dependent care benefits.

• The EIC.

See the IRS explanation of the tiebreaker rules in Publication 596.

Select the PRNT screen option EIC not being calculated? Mark this box, then see NOTES in View mode for explanation and review WK_EIC.

You can also turn this option on globally by going to Setup > Options > Form & Schedule Options and check the box Always show reason for no EIC.

The Earned Income Credit (EIC) can be suppressed or blocked in data entry on screen EIC by checking Prevent EIC from being calculated – Taxpayer does not qualify for EIC. The literal NO appears on the return beside the EIC section.

The software provides EF Messages to alert you that the taxpayer may qualify for the Earned Income Credit (EIC).

These messages are triggered when filing status, age, dependent information (if applicable), and income meet EIC guidelines, as established in Publication 596.

Such messages prevent the return from being e-filed until the preparer completes the expected data entry.

EF Message 5587

If there are dependents included on the return who may qualify the taxpayer for EIC, message 5587 may be produced.

Be sure you have answered all questions related to EIC under EIC Information, including those related to Residency of Qualifying Child, before leaving screen 2.

If you have not completed all necessary entries to meet guidelines, you may also receive EF Message 5588, discussed next.

EF Message 5588

If you have not completed the information required for Form 8867, and information on the return indicates the taxpayer may qualify for EIC, EF Message 5588 may be produced. Review your entries on screen 8867 and screen 2 under EIC Information, if applicable.

For more information, see the IRS websites Earned Income Tax Credit (EITC) and EITC Central and also Publication 3524.

If a paid preparer prepares a federal income tax return or a claim for refund that involves the Earned Income Credit (EIC), that preparer is required to complete Form 8867. In most cases, the Drake tax program automatically generates this form and requires that the preparer complete the 8867 screen for any return that involves EIC.

For returns involving EIC, there are three cases in which the program does not produce or require Form 8867. If the Preparer # field on screen 1:

• Displays NONE. A selection of NONE indicates that the return is self-prepared. Because there is no paid preparer, Form 8867 is not required. (An EIC worksheet will still be generated if NONE is selected.)

• Displays a number that has not been assigned to a preparer in Setup > Preparers and Users.

• Is blank and you are logged in as Admin. If the software cannot identify a preparer, it will not produce the 8867. You must log in as a preparer, or you must set the Preparer # field to a valid preparer.

This drop list allows you to choose why the child is not a qualifying child for EIC. If the child is a qualifying child for EIC, the drop list should be blank. If the child is not a qualifying child, select the applicable option:

• X – The dependent is not a qualifying child for EIC

• S – The dependent would be a qualifying child for EIC except that his or her SSN is not valid for work

A common use of this drop list is when there is a special circumstance where divorced or separated parents are claiming children in alternate years, or some other cases where a child may need to be included on a return, but EIC calculations should not include them as a qualifying child. Depending on the facts of the divorce or separation agreement (or other situation as determined by the preparer) if the EIC is calculating when this taxpayer is not claiming the credit for that child, you can use the drop list to remove the EIC from the return.

Yes, see the IRS Consequences of Not Meeting the Due Diligence Requirements page for details. Also see What is Form 8867? and the IRS EITC Central.