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File free state taxes only Publication 596 - Main Content Table of Contents Chapter 1—Rules for EveryoneRule 1—Adjusted Gross Income (AGI) Limits Rule 2—You Must Have a Valid Social Security Number (SSN) Rule 3—Your Filing Status Cannot Be Married Filing Separately Rule 4—You Must Be a U. File free state taxes only S. File free state taxes only Citizen or Resident Alien All Year Rule 5—You Cannot File Form 2555 or Form 2555-EZ Rule 6—Your Investment Income Must Be $3,300 or Less Rule 7—You Must Have Earned Income Chapter 2—Rules If You Have a Qualifying ChildRule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer Chapter 3—Rules If You Do Not Have a Qualifying ChildRule 11—You Must Be at Least Age 25 but Under Age 65 Rule 12—You Cannot Be the Dependent of Another Person Rule 13—You Cannot Be a Qualifying Child of Another Taxpayer Rule 14—You Must Have Lived in the United States More Than Half of the Year Chapter 4—Figuring and Claiming the EICRule 15—Earned Income Limits IRS Will Figure the EIC for You How To Figure the EIC Yourself Schedule EIC Chapter 5—Disallowance of the EICForm 8862 Are You Prohibited From Claiming the EIC for a Period of Years? Chapter 6—Detailed ExamplesExample 1—Sharon Rose Example 2—Cynthia and Jerry Grey Chapter 1—Rules for Everyone This chapter discusses Rules 1 through 7. File free state taxes only You must meet all seven rules to qualify for the earned income credit. File free state taxes only If you do not meet all seven rules, you cannot get the credit and you do not need to read the rest of the publication. File free state taxes only If you meet all seven rules in this chapter, then read either chapter 2 or chapter 3 (whichever applies) for more rules you must meet. File free state taxes only Rule 1—Adjusted Gross Income (AGI) Limits 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. File free state taxes only Adjusted gross income (AGI). File free state taxes only   AGI is the amount on line 4 of Form 1040EZ, line 22 of Form 1040A, or line 38 of Form 1040. File free state taxes only   If your AGI is equal to or more than the applicable limit listed above, you cannot claim the EIC. File free state taxes only You do not need to read the rest of this publication. File free state taxes only Example—AGI is more than limit. File free state taxes only Your AGI is $38,550, you are single, and you have one qualifying child. File free state taxes only You cannot claim the EIC because your AGI is not less than $37,870. File free state taxes only However, if your filing status was married filing jointly, you might be able to claim the EIC because your AGI is less than $43,210. File free state taxes only Community property. File free state taxes only   If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your AGI includes that portion of both your and your spouse's wages that you are required to include in gross income. File free state taxes only This is different from the community property rules that apply under Rule 7. File free state taxes only Rule 2—You Must Have a Valid Social Security Number (SSN) To claim the EIC, you (and your spouse, if filing a joint return) must have a valid SSN issued by the Social Security Administration (SSA). File free state taxes only Any qualifying child listed on Schedule EIC also must have a valid SSN. File free state taxes only (See Rule 8 if you have a qualifying child. File free state taxes only ) If your social security card (or your spouse's, if filing a joint return) 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. File free state taxes only An example of a federally funded benefit is Medicaid. File free state taxes only If you have a card with the legend “Not valid for employment” and your immigration status has changed so that you are now a U. File free state taxes only S. File free state taxes only citizen or permanent resident, ask the SSA for a new social security card without the legend. File free state taxes only If you get the new card after you have already filed your return, you can file an amended return on Form 1040X, Amended U. File free state taxes only S. File free state taxes only Individual Income Tax Return, to claim the EIC. File free state taxes only U. File free state taxes only S. File free state taxes only citizen. File free state taxes only   If you were a U. File free state taxes only S. File free state taxes only citizen when you received your SSN, you have a valid SSN. File free state taxes only Valid for work only with INS authorization or DHS authorization. File free state taxes only   If your social security card reads “Valid for work only with INS authorization” or “Valid for work only with DHS authorization,” you have a valid SSN, but only if that authorization is still valid. File free state taxes only SSN missing or incorrect. File free state taxes only   If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC. File free state taxes only Other taxpayer identification number. File free state taxes only   You cannot get the EIC if, instead of an SSN, you (or your spouse, if filing a joint return) have an individual taxpayer identification number (ITIN). File free state taxes only ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN. File free state taxes only No SSN. File free state taxes only   If you do not have a valid SSN, put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). File free state taxes only You cannot claim the EIC. File free state taxes only Getting an SSN. File free state taxes only   If you (or your spouse, if filing a joint return) do not have an SSN, you can apply for one by filing Form SS-5 with the SSA. File free state taxes only You can get Form SS-5 online at www. File free state taxes only socialsecurity. File free state taxes only gov, from your local SSA office, or by calling the SSA at 1-800-772-1213. File free state taxes only Filing deadline approaching and still no SSN. File free state taxes only   If the filing deadline is approaching and you still do not have an SSN, you have two choices. File free state taxes only Request an automatic 6-month extension of time to file your return. File free state taxes only You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U. File free state taxes only S. File free state taxes only Individual Income Tax Return. File free state taxes only For more information, see the instructions for Form 4868. File free state taxes only File the return on time without claiming the EIC. File free state taxes only After receiving the SSN, file an amended return, Form 1040X, claiming the EIC. File free state taxes only Attach a filled-in Schedule EIC, Earned Income Credit, if you have a qualifying child. File free state taxes only Rule 3—Your Filing Status Cannot Be “Married Filing Separately” If you are married, you usually must file a joint return to claim the EIC. File free state taxes only Your filing status cannot be “Married filing separately. File free state taxes only ” Spouse did not live with you. File free state taxes only   If you are married and your spouse did not live in your home at any time during the last 6 months of the year, you may be able to file as head of household, instead of married filing separately. File free state taxes only In that case, you may be able to claim the EIC. File free state taxes only For detailed information about filing as head of household, see Publication 501, Exemptions, Standard Deduction, and Filing Information. File free state taxes only Rule 4—You Must Be a U. File free state taxes only S. File free state taxes only Citizen or Resident Alien All Year If you (or your spouse, if married) were a nonresident alien for any part of the year, you cannot claim the earned income credit unless your filing status is married filing jointly. File free state taxes only You can use that filing status only if one spouse is a U. File free state taxes only S. File free state taxes only citizen or resident alien and you choose to treat the nonresident spouse as a U. File free state taxes only S. File free state taxes only resident. File free state taxes only If you make this choice, you and your spouse are taxed on your worldwide income. File free state taxes only If you need more information on making this choice, get Publication 519, U. File free state taxes only S. File free state taxes only Tax Guide for Aliens. File free state taxes only If you (or your spouse, if married) were a nonresident alien for any part of the year and your filing status is not married filing jointly, enter “No” on the dotted line next to line 64a (Form 1040) or in the space to the left of line 38a (Form 1040A). File free state taxes only Rule 5—You Cannot File Form 2555 or Form 2555-EZ You cannot claim the earned income credit if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. File free state taxes only You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. File free state taxes only U. File free state taxes only S. File free state taxes only possessions are not foreign countries. File free state taxes only See Publication 54, Tax Guide for U. File free state taxes only S. File free state taxes only Citizens and Resident Aliens Abroad, for more detailed information. File free state taxes only Rule 6—Your Investment Income Must Be $3,300 or Less You cannot claim the earned income credit unless your investment income is $3,300 or less. File free state taxes only If your investment income is more than $3,300, you cannot claim the credit. File free state taxes only Form 1040EZ. File free state taxes only   If you file Form 1040EZ, your investment income is the total of the amount on line 2 and the amount of any tax-exempt interest you wrote to the right of the words “Form 1040EZ” on line 2. File free state taxes only Form 1040A. File free state taxes only   If you file Form 1040A, your investment income is the total of the amounts on lines 8a (taxable interest), 8b (tax-exempt interest), 9a (ordinary dividends), and 10 (capital gain distributions) on that form. File free state taxes only Form 1040. File free state taxes only   If you file Form 1040, use Worksheet 1 in this chapter to figure your investment income. File free state taxes only    Worksheet 1. File free state taxes only Investment Income If You Are Filing Form 1040 Use this worksheet to figure investment income for the earned income credit when you file Form 1040. File free state taxes only Interest and Dividends         1. File free state taxes only Enter any amount from Form 1040, line 8a 1. File free state taxes only   2. File free state taxes only Enter any amount from Form 1040, line 8b, plus any amount on Form 8814, line 1b 2. File free state taxes only   3. File free state taxes only Enter any amount from Form 1040, line 9a 3. File free state taxes only   4. File free state taxes only Enter the amount from Form 1040, line 21, that is from Form 8814 if you are filing that form to report your child's interest and dividend income on your return. File free state taxes only (If your child received an Alaska Permanent Fund dividend, use Worksheet 2 in this chapter to figure the amount to enter on this line. File free state taxes only ) 4. File free state taxes only   Capital Gain Net Income         5. File free state taxes only Enter the amount from Form 1040, line 13. File free state taxes only If the amount on that line is a loss, enter -0- 5. File free state taxes only       6. File free state taxes only Enter any gain from Form 4797, Sales of Business Property, line 7. File free state taxes only If the amount on that line is a loss, enter -0-. File free state taxes only (But, if you completed lines 8 and 9 of Form 4797, enter the amount from line 9 instead. File free state taxes only ) 6. File free state taxes only       7. File free state taxes only Substract line 6 of this worksheet from line 5 of this worksheet. File free state taxes only (If the result is less than zero, enter -0-. File free state taxes only ) 7. File free state taxes only   Royalties and Rental Income From Personal Property         8. File free state taxes only Enter any royalty income from Schedule E, line 23b, plus any income from the rental of personal property shown on Form 1040, line 21 8. File free state taxes only       9. File free state taxes only Enter any expenses from Schedule E, line 20, related to royalty income, plus any expenses from the rental of personal property deducted on Form 1040, line 36 9. File free state taxes only       10. File free state taxes only Subtract the amount on line 9 of this worksheet from the amount on line 8. File free state taxes only (If the result is less than zero, enter -0-. File free state taxes only ) 10. File free state taxes only   Passive Activities         11. File free state taxes only Enter the total of any net income from passive activities (such as income included on Schedule E, line 26, 29a (col. File free state taxes only (g)), 34a (col. File free state taxes only (d)), or 40). File free state taxes only (See instructions below for lines 11 and 12. File free state taxes only ) 11. File free state taxes only       12. File free state taxes only Enter the total of any losses from passive activities (such as losses included on Schedule E, line 26, 29b (col. File free state taxes only (f)), 34b (col. File free state taxes only (c)), or 40). File free state taxes only (See instructions below for lines 11 and 12. File free state taxes only ) 12. File free state taxes only       13. File free state taxes only Combine the amounts on lines 11 and 12 of this worksheet. File free state taxes only (If the result is less than zero, enter -0-. File free state taxes only ) 13. File free state taxes only   14. File free state taxes only Add the amounts on lines 1, 2, 3, 4, 7, 10, and 13. File free state taxes only Enter the total. File free state taxes only This is your investment income 14. File free state taxes only   15. File free state taxes only Is the amount on line 14 more than $3,300? ❑ Yes. File free state taxes only You cannot take the credit. File free state taxes only  ❑ No. File free state taxes only Go to Step 3 of the Form 1040 instructions for lines 64a and 64b to find out if you can take the credit (unless you are using this publication to find out if you can take the credit; in that case, go to Rule 7, next). File free state taxes only       Instructions for lines 11 and 12. File free state taxes only In figuring the amount to enter on lines 11 and 12, do not take into account any royalty income (or loss) included on line 26 of Schedule E or any amount included in your earned income. File free state taxes only To find out if the income on line 26 or line 40 of Schedule E is from a passive activity, see the Schedule E instructions. File free state taxes only If any of the rental real estate income (or loss) included on Schedule E, line 26, is not from a passive activity, print “NPA” and the amount of that income (or loss) on the dotted line next to line 26. File free state taxes only Worksheet 2. File free state taxes only Worksheet for Line 4 of Worksheet 1 Complete this worksheet only if Form 8814 includes an Alaska Permanent Fund dividend. File free state taxes only Note. File free state taxes only Fill out a separate Worksheet 2 for each Form 8814. File free state taxes only     1. File free state taxes only Enter the amount from Form 8814, line 2a 1. File free state taxes only   2. File free state taxes only Enter the amount from Form 8814, line 2b 2. File free state taxes only   3. File free state taxes only Subtract line 2 from line 1 3. File free state taxes only   4. File free state taxes only Enter the amount from Form 8814, line 1a 4. File free state taxes only   5. File free state taxes only Add lines 3 and 4 5. File free state taxes only   6. File free state taxes only Enter the amount of the child's Alaska Permanent Fund dividend 6. File free state taxes only   7. File free state taxes only Divide line 6 by line 5. File free state taxes only Enter the result as a decimal (rounded to at least three places) 7. File free state taxes only   8. File free state taxes only Enter the amount from Form 8814, line 12 8. File free state taxes only   9. File free state taxes only Multiply line 7 by line 8 9. File free state taxes only   10. File free state taxes only Subtract line 9 from line 8. File free state taxes only Enter the result on line 4 of Worksheet 1 10. File free state taxes only     (If filing more than one Form 8814, enter on line 4 of Worksheet 1 the total of the amounts on line 10 of all Worksheets 2. File free state taxes only )     Example—completing Worksheet 2. File free state taxes only Your 10-year-old child has taxable interest income of $400, an Alaska Permanent Fund dividend of $1,000, and ordinary dividends of $1,100, of which $500 are qualified dividends. File free state taxes only You choose to report this income on your return. File free state taxes only You enter $400 on line 1a of Form 8814, $2,100 ($1,000 + $1,100) on line 2a, and $500 on line 2b. File free state taxes only After completing lines 4 through 11, you enter $400 on line 12 of Form 8814 and line 21 of Form 1040. File free state taxes only On Worksheet 2, you enter $2,100 on line 1, $500 on line 2, $1,600 on line 3, $400 on line 4, $2,000 on line 5, $1,000 on line 6, 0. File free state taxes only 500 on line 7, $400 on line 8, $200 on line 9, and $200 on line 10. File free state taxes only You then enter $200 on line 4 of Worksheet 1. File free state taxes only Rule 7—You Must Have Earned Income This credit is called the “earned income” credit because, to qualify, you must work and have earned income. File free state taxes only If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. File free state taxes only If you are an employee, earned income includes all the taxable income you get from your employer. File free state taxes only Rule 15 has information that will help you figure the amount of your earned income. File free state taxes only If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the Form 1040 instructions. File free state taxes only Earned Income Earned income includes all of the following types of income. File free state taxes only Wages, salaries, tips, and other taxable employee pay. File free state taxes only Employee pay is earned income only if it is taxable. File free state taxes only Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. File free state taxes only But there is an exception for nontaxable combat pay, which you can choose to include in earned income, as explained later in this chapter. File free state taxes only Net earnings from self-employment. File free state taxes only Gross income received as a statutory employee. File free state taxes only Wages, salaries, and tips. File free state taxes only    Wages, salaries, and tips you receive for working are reported to you on Form W-2, in box 1. File free state taxes only You should report these on line 1 (Form 1040EZ) or line 7 (Forms 1040A and 1040). File free state taxes only Nontaxable combat pay election. File free state taxes only   You can elect to include your nontaxable combat pay in earned income for the earned income credit. File free state taxes only The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q. File free state taxes only Electing to include nontaxable combat pay in earned income may increase or decrease your EIC. File free state taxes only For details, see Nontaxable combat pay in chapter 4. File free state taxes only Net earnings from self-employment. File free state taxes only   You may have net earnings from self-employment if: You own your own business, or You are a minister or member of a religious order. File free state taxes only Minister's housing. File free state taxes only   The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. File free state taxes only For that reason, it is included in earned income for the EIC (except in the cases described in Approved Form 4361 or Form 4029 , below). File free state taxes only Statutory employee. File free state taxes only   You are a statutory employee if you receive a Form W-2 on which the “Statutory employee” box (box 13) is checked. File free state taxes only You report your income and expenses as a statutory employee on Schedule C or C-EZ (Form 1040). File free state taxes only Strike benefits. File free state taxes only   Strike benefits paid by a union to its members are earned income. File free state taxes only Approved Form 4361 or Form 4029 This section is for persons who have an approved: Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. File free state taxes only Each approved form exempts certain income from social security taxes. File free state taxes only Each form is discussed here in terms of what is or is not earned income for the EIC. File free state taxes only Form 4361. File free state taxes only   Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. File free state taxes only This includes wages, salaries, tips, and other taxable employee compensation. File free state taxes only A nontaxable housing allowance or the nontaxable rental value of a home is not earned income. File free state taxes only Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. File free state taxes only Examples include fees for performing marriages and honoraria for delivering speeches. File free state taxes only Form 4029. File free state taxes only   Whether or not you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation count as earned income. File free state taxes only However, amounts you received as a self-employed individual do not count as earned income. File free state taxes only Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040. File free state taxes only 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. File free state taxes only Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. File free state taxes only You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age. File free state taxes only Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. File free state taxes only Report taxable pension payments on Form 1040, lines 16a and 16b, or Form 1040A, lines 12a and 12b. File free state taxes only Disability insurance payments. File free state taxes only   Payments you received from a disability insurance policy that you paid the premiums for are not earned income. File free state taxes only It does not matter whether you have reached minimum retirement age. File free state taxes only If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code “J. File free state taxes only ” Income That Is Not Earned Income Examples of items that are not earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. File free state taxes only Do not include any of these items in your earned income. File free state taxes only Earnings while an inmate. File free state taxes only   Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. File free state taxes only This includes amounts for work performed while in a work release program or while in a halfway house. File free state taxes only Workfare payments. File free state taxes only   Nontaxable workfare payments are not earned income for the EIC. File free state taxes only 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. File free state taxes only Community property. File free state taxes only   If you are married, but qualify to file as head of household under special rules for married taxpayers living apart (see Rule 3), and live in a state that has community property laws, your earned income for the EIC does not include any amount earned by your spouse that is treated as belonging to you under those laws. File free state taxes only That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. File free state taxes only Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your state's community property laws. File free state taxes only Nevada, Washington, and California domestic partners. File free state taxes only   If you are a registered domestic partner in Nevada, Washington, or California, the same rules apply. File free state taxes only Your earned income for the EIC does not include any amount earned by your partner. File free state taxes only Your earned income includes the entire amount you earned. File free state taxes only For details, see Publication 555. File free state taxes only Conservation Reserve Program (CRP) payments. File free state taxes only   If you were receiving social security retirement benefits or social security disability benefits at the time you received any CRP payments, your CRP payments are not earned income for the EIC. File free state taxes only Nontaxable military pay. File free state taxes only   Nontaxable pay for members of the Armed Forces is not considered earned income for the EIC. File free state taxes only Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). File free state taxes only See Publication 3, Armed Forces' Tax Guide, for more information. File free state taxes only    Combat pay. File free state taxes only You can elect to include your nontaxable combat pay in earned income for the EIC. File free state taxes only See Nontaxable combat pay in chapter 4. File free state taxes only Chapter 2—Rules If You Have a Qualifying Child If you have met all the rules in chapter 1, use this chapter to see if you have a qualifying child. File free state taxes only This chapter discusses Rules 8 through 10. File free state taxes only You must meet all three of those rules, in addition to the rules in chapters 1 and 4, to qualify for the earned income credit with a qualifying child. File free state taxes only You must file Form 1040 or Form 1040A to claim the EIC with a qualifying child. File free state taxes only (You cannot file Form 1040EZ. File free state taxes only ) You also must complete Schedule EIC and attach it to your return. File free state taxes only If you meet all the rules in chapter 1 and this chapter, read chapter 4 to find out what to do next. File free state taxes only No qualifying child. File free state taxes only   If you do not meet Rule 8, you do not have a qualifying child. File free state taxes only Read chapter 3 to find out if you can get the earned income credit without a qualifying child. File free state taxes only Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Your child is a qualifying child if your child meets four tests. File free state taxes only The fours tests are: Relationship, Age, Residency, and Joint return. File free state taxes only The four tests are illustrated in Figure 1. File free state taxes only The paragraphs that follow contain more information about each test. File free state taxes only Relationship Test To be your qualifying child, a child must be 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). File free state taxes only The following definitions clarify the relationship test. File free state taxes only Adopted child. File free state taxes only   An adopted child is always treated as your own child. File free state taxes only The term “adopted child” includes a child who was lawfully placed with you for legal adoption. File free state taxes only Foster child. File free state taxes only   For the EIC, a person is your foster child if the child is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. File free state taxes only (An authorized placement agency includes a state or local government agency. File free state taxes only It also includes a tax-exempt organization licensed by a state. File free state taxes only In addition, it includes an Indian tribal government or an organization authorized by an Indian tribal government to place Indian children. File free state taxes only ) Example. File free state taxes only Debbie, who is 12 years old, was placed in your care 2 years ago by an authorized agency responsible for placing children in foster homes. File free state taxes only Debbie is your foster child. File free state taxes only Figure 1. File free state taxes only Tests for Qualifying Child Please click here for the text description of the image. File free state taxes only Conditions for Qualifying Child Age Test Your child must be: Under age 19 at the end of 2013 and younger than you (or your spouse, if filing jointly), 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 2013, regardless of age. File free state taxes only The following examples and definitions clarify the age test. File free state taxes only Example 1—child not under age 19. File free state taxes only Your son turned 19 on December 10. File free state taxes only Unless he was permanently and totally disabled or a student, he is not a qualifying child because, at the end of the year, he was not under age 19. File free state taxes only Example 2—child not younger than you or your spouse. File free state taxes only Your 23-year-old brother, who is a full-time student and unmarried, lives with you and your spouse. File free state taxes only He is not disabled. File free state taxes only Both you and your spouse are 21 years old, and you file a joint return. File free state taxes only Your brother is not your qualifying child because he is not younger than you or your spouse. File free state taxes only Example 3—child younger than your spouse but not younger than you. File free state taxes only The facts are the same as in Example 2 except that your spouse is 25 years old. File free state taxes only Because your brother is younger than your spouse, he is your qualifying child, even though he is not younger than you. File free state taxes only Student defined. File free state taxes only   To qualify as a student, your child must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regular student body at the school, or A student taking a full-time, on-farm training course given by a school described in (1), or a state, county, or local government. File free state taxes only   The 5 calendar months need not be consecutive. File free state taxes only   A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance. File free state taxes only School defined. File free state taxes only   A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. File free state taxes only However, on-the-job training courses, correspondence schools, and schools offering courses only through the Internet do not count as schools for the EIC. File free state taxes only Vocational high school students. File free state taxes only   Students who work in co-op jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students. File free state taxes only Permanently and totally disabled. File free state taxes only   Your child is permanently and totally disabled if both of the following apply. File free state taxes only He or she cannot engage in any substantial gainful activity because of a physical or mental condition. File free state taxes only A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death. File free state taxes only Residency Test Your child must have lived with you in the United States for more than half of 2013. File free state taxes only The following definitions clarify the residency test. File free state taxes only United States. File free state taxes only   This means the 50 states and the District of Columbia. File free state taxes only It does not include Puerto Rico or U. File free state taxes only S. File free state taxes only possessions such as Guam. File free state taxes only Homeless shelter. File free state taxes only   Your home can be any location where you regularly live. File free state taxes only You do not need a traditional home. File free state taxes only For example, if your child lived with you for more than half the year in one or more homeless shelters, your child meets the residency test. File free state taxes only Military personnel stationed outside the United States. File free state taxes only   U. File free state taxes only S. File free state taxes only military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC. File free state taxes only Extended active duty. File free state taxes only   Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. File free state taxes only Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days. File free state taxes only Birth or death of child. File free state taxes only    child who was born or died in 2013 is treated as having lived with you for more than half of 2013 if your home was the child's home for more than half the time he or she was alive in 2013. File free state taxes only Temporary absences. File free state taxes only   Count time that you or your child is away from home on a temporary absence due to a special circumstance as time the child lived with you. File free state taxes only Examples of a special circumstance include illness, school attendance, business, vacation, military service, and detention in a juvenile facility. File free state taxes only Kidnapped child. File free state taxes only   A kidnapped child is treated as living with you for more than half of the year if the child lived with you for more than half the part of the year before the date of the kidnapping. File free state taxes only The child must be presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or the child's family. File free state taxes only This treatment applies for all years until the child is returned. File free state taxes only However, the last year this treatment can apply is the earlier of: The year there is a determination that the child is dead, or The year the child would have reached age 18. File free state taxes only   If your qualifying child has been kidnapped and meets these requirements, enter “KC,” instead of a number, on line 6 of Schedule EIC. File free state taxes only Joint Return Test To meet this test, the child cannot file a joint return for the year. File free state taxes only Exception. File free state taxes only   An exception to the joint return test applies if your child and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid. File free state taxes only Example 1—child files joint return. File free state taxes only You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. File free state taxes only He earned $25,000 for the year. File free state taxes only The couple files a joint return. File free state taxes only Because your daughter and her husband file a joint return, she is not your qualifying child. File free state taxes only Example 2—child files joint return to get refund of tax withheld. File free state taxes only Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. File free state taxes only They do not have a child. File free state taxes only Neither is required to file a tax return. File free state taxes only Taxes were taken out of their pay, so they file a joint return only to get a refund of the withheld taxes. File free state taxes only The exception to the joint return test applies, so your son may be your qualifying child if all the other tests are met. File free state taxes only Example 3—child files joint return to claim American opportunity credit. File free state taxes only The facts are the same as in Example 2 except no taxes were taken out of your son's pay. File free state taxes only He and his wife are not required to file a tax return, but they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. File free state taxes only Because claiming the American opportunity credit is their reason for filing the return, they are not filing it only to claim a refund of income tax withheld or estimated tax paid. File free state taxes only The exception to the joint return test does not apply, so your son is not your qualifying child. File free state taxes only Married child. File free state taxes only   Even if your child does not file a joint return, if your child was married at the end of the year, he or she cannot be your qualifying child unless: You can claim an exemption for the child, or The reason you cannot claim an exemption for the child is that you let the child's other parent claim the exemption under the Special rule for divorced or separated parents (or parents who live apart) described later. File free state taxes only    Social security number. File free state taxes only Your qualifying child must have a valid social security number (SSN), unless the child was born and died in 2013 and you attach to your return a copy of the child's birth certificate, death certificate, or hospital records showing a live birth. File free state taxes only You cannot claim the EIC on the basis of a qualifying child if: The qualifying child's SSN is missing from your tax return or is incorrect, The qualifying child's social security card says “Not valid for employment” and was issued for use in getting a federally funded benefit, or Instead of an SSN, the qualifying child has: An individual taxpayer identification number (ITIN), which is issued to a noncitizen who cannot get an SSN, or An adoption taxpayer identification number (ATIN), issued to adopting parents who cannot get an SSN for the child being adopted until the adoption is final. File free state taxes only   If you have more than one qualifying child and only one has a valid SSN, you can use only that child to claim the EIC. File free state taxes only For more information about SSNs, see Rule 2. File free state taxes only Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC Sometimes a child meets the tests to be a qualifying child of more than one person. File free state taxes only However, only one of these persons can actually treat the child as a qualifying child. File free state taxes only Only that person can use the child as a qualifying child to take all of the following tax benefits (provided the person is eligible for each benefit). File free state taxes only The exemption for the child. File free state taxes only The child tax credit. File free state taxes only Head of household filing status. File free state taxes only The credit for child and dependent care expenses. File free state taxes only The exclusion for dependent care benefits. File free state taxes only The EIC. File free state taxes only The other person cannot take any of these benefits based on this qualifying child. File free state taxes only In other words, you and the other person cannot agree to divide these tax benefits between you. File free state taxes only The other person cannot take any of these tax benefits unless he or she has a different qualifying child. File free state taxes only The tiebreaker rules, which follow, explain who, if anyone, can claim the EIC when more than one person has the same qualifying child. File free state taxes only However, the tiebreaker rules do not apply if the other person is your spouse and you file a joint return. File free state taxes only Tiebreaker rules. File free state taxes only   To determine which person can treat the child as a qualifying child to claim the six tax benefits just listed, the following tiebreaker rules apply. File free state taxes only If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent. File free state taxes only If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents. File free state taxes only If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. File free state taxes only If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year. File free state taxes only If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year. File free state taxes only If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child. File free state taxes only If the child's parents file a joint return with each other, this rule can be applied by treating the parents' total AGI as divided evenly between them. File free state taxes only See Example 8. File free state taxes only   Subject to these tiebreaker rules, you and the other person may be able to choose which of you claims the child as a qualifying child. File free state taxes only See Examples 1 through 13. File free state taxes only   If you cannot claim the EIC because your qualifying child is treated under the tiebreaker rules as the qualifying child of another person for 2013, you may be able to take the EIC using a different qualifying child, but you cannot take the EIC using the rules in chapter 3 for people who do not have a qualifying child. File free state taxes only If the other person cannot claim the EIC. File free state taxes only   If you and someone else have the same qualifying child but the other person cannot claim the EIC because he or she is not eligible or his or her earned income or AGI is too high, you may be able to treat the child as a qualifying child. File free state taxes only See Examples 6 and 7. File free state taxes only But you cannot treat the child as a qualifying child to claim the EIC if the other person uses the child to claim any of the other six tax benefits listed earlier in this chapter. File free state taxes only Examples. File free state taxes only    The following examples may help you in determining whether you can claim the EIC when you and someone else have the same qualifying child. File free state taxes only Example 1—child lived with parent and grandparent. File free state taxes only You and your 2-year-old son Jimmy lived with your mother all year. File free state taxes only You are 25 years old, unmarried, and your AGI is $9,000. File free state taxes only Your only income was $9,000 from a part-time job. File free state taxes only Your mother's only income was $20,000 from her job, and her AGI is $20,000. File free state taxes only Jimmy's father did not live with you or Jimmy. File free state taxes only The special rule explained later for divorced or separated parents (or parents who live apart) does not apply. File free state taxes only Jimmy is a qualifying child of both you and your mother because he meets the relationship, age, residency, and joint return tests for both you and your mother. File free state taxes only However, only one of you can treat him as a qualifying child to claim the EIC (and the other tax benefits listed earlier in this chapter for which that person qualifies). File free state taxes only He is not a qualifying child of anyone else, including his father. File free state taxes only If you do not claim Jimmy as a qualifying child for the EIC or any of the other tax benefits listed earlier, your mother can treat him as a qualifying child to claim the EIC (and any of the other tax benefits listed earlier for which she qualifies). File free state taxes only Example 2—parent has higher AGI than grandparent. File free state taxes only The facts are the same as in Example 1 except your AGI is $25,000. File free state taxes only Because your mother's AGI is not higher than yours, she cannot claim Jimmy as a qualifying child. File free state taxes only Only you can claim him. File free state taxes only Example 3—two persons claim same child. File free state taxes only The facts are the same as in Example 1 except that you and your mother both claim Jimmy as a qualifying child. File free state taxes only In this case, you as the child's parent will be the only one allowed to claim Jimmy as a qualifying child for the EIC and the other tax benefits listed earlier for which you qualify. File free state taxes only The IRS will disallow your mother's claim to the EIC and any of the other tax benefits listed earlier unless she has another qualifying child. File free state taxes only Example 4—qualifying children split between two persons. File free state taxes only The facts are the same as in Example 1 except that you also have two other young children who are qualifying children of both you and your mother. File free state taxes only Only one of you can claim each child. File free state taxes only However, if your mother's AGI is higher than yours, you can allow your mother to claim one or more of the children. File free state taxes only For example, if you claim one child, your mother can claim the other two. File free state taxes only Example 5—taxpayer who is a qualifying child. File free state taxes only The facts are the same as in Example 1 except that you are only 18 years old. File free state taxes only This means you are a qualifying child of your mother. File free state taxes only Because of Rule 10, discussed next, you cannot claim the EIC and cannot claim your son as a qualifying child. File free state taxes only Only your mother may be able to treat Jimmy as a qualifying child to claim the EIC. File free state taxes only If your mother meets all the other requirements for claiming the EIC and you do not claim Jimmy as a qualifying child for any of the other tax benefits listed earlier, your mother can claim both you and Jimmy as qualifying children for the EIC. File free state taxes only Example 6—grandparent with too much earned income to claim EIC. File free state taxes only The facts are the same as in Example 1 except that your mother earned $50,000 from her job. File free state taxes only Because your mother's earned income is too high for her to claim the EIC, only you can claim the EIC using your son. File free state taxes only Example 7—parent with too much earned income to claim EIC. File free state taxes only The facts are the same as in Example 1 except that you earned $50,000 from your job and your AGI is $50,500. File free state taxes only Your earned income is too high for you to claim the EIC. File free state taxes only But your mother cannot claim the EIC either, because her AGI is not higher than yours. File free state taxes only Example 8—child lived with both parents and grandparent. File free state taxes only The facts are the same as in Example 1 except that you and Jimmy's father are married to each other, live with Jimmy and your mother, and have AGI of $30,000 on a joint return. File free state taxes only If you and your husband do not claim Jimmy as a qualifying child for the EIC or any of the other tax benefits listed earlier, your mother can claim him instead. File free state taxes only Even though the AGI on your joint return, $30,000, is more than your mother's AGI of $20,000, for this purpose half of the joint AGI can be treated as yours and half as your husband's. File free state taxes only In other words, each parent's AGI can be treated as $15,000. File free state taxes only Example 9—separated parents. File free state taxes only You, your husband, and your 10-year-old son Joey lived together until August 1, 2013, when your husband moved out of the household. File free state taxes only In August and September, Joey lived with you. File free state taxes only For the rest of the year, Joey lived with your husband, who is Joey's father. File free state taxes only Joey is a qualifying child of both you and your husband because he lived with each of you for more than half the year and because he met the relationship, age, and joint return tests for both of you. File free state taxes only At the end of the year, you and your husband still were not divorced, legally separated, or separated under a written separation agreement, so the Special rule for divorced or separated parents (or parents who live apart) does not apply. File free state taxes only You and your husband will file separate returns. File free state taxes only Your husband agrees to let you treat Joey as a qualifying child. File free state taxes only This means, if your husband does not claim Joey as a qualifying child for any of the tax benefits listed earlier, you can claim him as a qualifying child for any tax benefit listed earlier for which you qualify. File free state taxes only However, your filing status is married filing separately, so you cannot claim the EIC or the credit for child and dependent care expenses. File free state taxes only See Rule 3. File free state taxes only Example 10—separated parents claim same child. File free state taxes only The facts are the same as in Example 9 except that you and your husband both claim Joey as a qualifying child. File free state taxes only In this case, only your husband will be allowed to treat Joey as a qualifying child. File free state taxes only This is because, during 2013, the boy lived with him longer than with you. File free state taxes only You cannot claim the EIC (either with or without a qualifying child). File free state taxes only However, your husband's filing status is married filing separately, so he cannot claim the EIC or the credit for child and dependent care expenses. File free state taxes only See Rule 3. File free state taxes only Example 11—unmarried parents. File free state taxes only You, your 5-year-old son, and your son's father lived together all year. File free state taxes only You and your son's father are not married. File free state taxes only Your son is a qualifying child of both you and his father because he meets the relationship, age, residency, and joint return tests for both you and his father. File free state taxes only Your earned income and AGI are $12,000, and your son's father's earned income and AGI are $14,000. File free state taxes only Neither of you had any other income. File free state taxes only Your son's father agrees to let you treat the child as a qualifying child. File free state taxes only This means, if your son's father does not claim your son as a qualifying child for the EIC or any of the other tax benefits listed earlier, you can claim him as a qualifying child for the EIC and any of the other tax benefits listed earlier for which you qualify. File free state taxes only Example 12—unmarried parents claim same child. File free state taxes only The facts are the same as in Example 11 except that you and your son's father both claim your son as a qualifying child. File free state taxes only In this case, only your son's father will be allowed to treat your son as a qualifying child. File free state taxes only This is because his AGI, $14,000, is more than your AGI, $12,000. File free state taxes only You cannot claim the EIC (either with or without a qualifying child). File free state taxes only Example 13—child did not live with a parent. File free state taxes only You and your 7-year-old niece, your sister's child, lived with your mother all year. File free state taxes only You are 25 years old, and your AGI is $9,300. File free state taxes only Your only income was from a part-time job. File free state taxes only Your mother's AGI is $15,000. File free state taxes only Her only income was from her job. File free state taxes only Your niece's parents file jointly, have an AGI of less than $9,000, and do not live with you or their child. File free state taxes only Your niece is a qualifying child of both you and your mother because she meets the relationship, age, residency, and joint return tests for both you and your mother. File free state taxes only However, only your mother can treat her as a qualifying child. File free state taxes only This is because your mother's AGI, $15,000, is more than your AGI, $9,300. File free state taxes only Special rule for divorced or separated parents (or parents who live apart). File free state taxes only   A child will be treated as the qualifying child of his or her noncustodial parent (for purposes of claiming an exemption and the child tax credit, but not for the EIC) if all of the following statements are true. File free state taxes only The parents: Are divorced or legally separated under a decree of divorce or separate maintenance, Are separated under a written separation agreement, or Lived apart at all time during the last 6 months of 2013, whether or not they are or were married. File free state taxes only The child received over half of his or her support for the year from the parents. File free state taxes only The child is in the custody of one or both parents for more than half of 2013. File free state taxes only Either of the following statements is true. File free state taxes only The custodial parent signs Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches the form or statement to his or her return. File free state taxes only If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement instead of Form 8332. File free state taxes only A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2013 provides that the noncustodial parent can claim the child as a dependent, and the noncustodial parent provides at least $600 for support of the child during 2013. File free state taxes only For details, see Publication 501. File free state taxes only Also see Applying Rule 9 to divorced or separated parents (or parents who live apart), next. File free state taxes only Applying Rule 9 to divorced or separated parents (or parents who live apart). File free state taxes only   If a child is treated as the qualifying child of the noncustodial parent under the special rule just described for children of divorced or separated parents (or parents who live apart), only the noncustodial parent can claim an exemption and the child tax credit for the child. File free state taxes only However, the custodial parent, if eligible, or another eligible taxpayer can claim the child as a qualifying child for the EIC and other tax benefits listed earlier in this chapter. File free state taxes only If the child is the qualifying child of more than one person for these benefits, then the tiebreaker rules determine which person can treat the child as a qualifying child. File free state taxes only Example 1. File free state taxes only You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. File free state taxes only Your AGI is $10,000. File free state taxes only Your mother’s AGI is $25,000. File free state taxes only Your son's father did not live with you or your son. File free state taxes only Under the Special rule for divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim an exemption and the child tax credit for the child. File free state taxes only However, your son's father cannot claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, or the EIC. File free state taxes only You and your mother did not have any child care expenses or dependent care benefits. File free state taxes only If you do not claim your son as a qualifying child, your mother can claim him as a qualifying child for the EIC and head of household filing status, if she qualifies for these tax benefits. File free state taxes only Example 2. File free state taxes only The facts are the same as in Example 1 except that your AGI is $25,000 and your mother's AGI is $21,000. File free state taxes only Your mother cannot claim your son as a qualifying child for any purpose because her AGI is not higher than yours. File free state taxes only Example 3. File free state taxes only The facts are the same as in Example 1 except that you and your mother both claim your son as a qualifying child for the EIC. File free state taxes only Your mother also claims him as a qualifying child for head of household filing status. File free state taxes only You as the child's parent will be the only one allowed to claim your son as a qualifying child for the EIC. File free state taxes only The IRS will disallow your mother's claim to the EIC and head of household filing status unless she has another qualifying child. File free state taxes only Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. File free state taxes only ) if all of the following statements are true. File free state taxes only You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. File free state taxes only Or, you are that person's brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. File free state taxes only You were: Under age 19 at the end of the year and younger than that person (or that person's spouse, if the person files jointly), Under age 24 at the end of the year, a student, and younger than that person (or that person's spouse, if the person files jointly), or Permanently and totally disabled, regardless of age. File free state taxes only You lived with that person in the United States for more than half of the year. File free state taxes only You are not filing a joint return for the year (or are filing a joint return only to claim a refund of withheld income tax or estimated tax paid). File free state taxes only For more details about the tests to be a qualifying child, see Rule 8. File free state taxes only If you are a qualifying child of another taxpayer, you cannot claim the EIC. File free state taxes only This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. File free state taxes only Put “No” beside line 64a (Form 1040) or line 38a (Form 1040A). File free state taxes only Example. File free state taxes only You and your daughter lived with your mother all year. File free state taxes only You are 22 years old, unmarried, and attended a trade school full time. File free state taxes only You had a part-time job and earned $5,700. File free state taxes only You had no other income. File free state taxes only Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother. File free state taxes only She can claim the EIC if she meets all the other requirements. File free state taxes only Because you are your mother's qualifying child, you cannot claim the EIC. File free state taxes only This is so even if your mother cannot or does not claim the EIC. File free state taxes only Child of person not required to file a return. File free state taxes only   You are not the qualifying child of another taxpayer (and so may qualify to claim the EIC) if the person for whom you met the relationship, age, residency, and joint return tests is not required to file an income tax return and either: Does not file an income tax return, or Files a return only to get a refund of income tax withheld or estimated tax paid. File free state taxes only Example 1—return not required. File free state taxes only The facts are the same as in the last example except your mother had no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. File free state taxes only As a result, you are not your mother's qualifying child. File free state taxes only You can claim the EIC if you meet all the other requirements to do so. File free state taxes only Example 2—return filed to get refund of tax withheld. File free state taxes only The facts are the same as in Example 1 except your mother had wages of $1,500 and had income tax withheld from her wages. File free state taxes only She files a return only to get a refund of the income tax withheld and does not claim the EIC or any other tax credits or deductions. File free state taxes only As a result, you are not your mother's qualifying child. File free state taxes only You can claim the EIC if you meet all the other requirements to do so. File free state taxes only Example 3—return filed to get EIC. File free state taxes only The facts are the same as in Example 2 except your mother claimed the EIC on her return. File free state taxes only Since she filed the return to get the EIC, she is not filing it only to get a refund of income tax withheld. File free state taxes only As a result, you are your mother's qualifying child. File free state taxes only You cannot claim the EIC. File free state taxes only Chapter 3—Rules If You Do Not Have a Qualifying Child Use this chapter if you do not have a qualifying child and have met all the rules in chapter 1. File free state taxes only This chapter discusses Rules 11 through 14. File free state taxes only You must meet all four of those rules, in addition to the rules in chapters 1 and 4, to qualify for the earned income credit without a qualifying child. File free state taxes only You can file Form 1040, Form 1040A, or Form 1040EZ to claim the EIC without a qualifying child. File free state taxes only If you meet all the rules in chapter 1 and this chapter, read chapter 4 to find out what to do next. File free state taxes only If you have a qualifying child. File free state taxes only   If you meet Rule 8, you have a qualifying child. File free state taxes only If you meet Rule 8 and do not claim the EIC with a qualifying child, you cannot claim the EIC without a qualifying child. File free state taxes only Rule 11—You Must Be at Least Age 25 but Under Age 65 You must be at least age 25 but under age 65 at the end of 2013. File free state taxes only If you are married filing a joint return, either you or your spouse must be at least age 25 but under age 65 at the end of 2013. File free state taxes only It does not matter which spouse meets the age test, as long as one of the spouses does. File free state taxes only You meet the age test if you were born after December 31, 1948, and before January 2, 1989. File free state taxes only If you are married filing a joint return, you meet the age test if either you or your spouse was born after December 31, 1948, and before January 2, 1989. File free state taxes only If neither you nor your spouse meets the age test, you cannot claim the EIC. File free state taxes only Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). File free state taxes only Death of spouse. File free state taxes only   If you are filing a joint return with your spouse who died in 2013, you meet the age test if your spouse was at least age 25 but under age 65 at the time of death. File free state taxes only Example 1. File free state taxes only You are age 28 and unmarried. File free state taxes only You meet the age test. File free state taxes only Example 2—spouse meets age test. File free state taxes only You are married and filing a joint return. File free state taxes only You are age 23 and your spouse is age 27. File free state taxes only You meet the age test because your spouse is at least age 25 but under age 65. File free state taxes only Example 3—spouse dies in 2013. File free state taxes only You are married and filing a joint return with your spouse who died in August 2013. File free state taxes only You are age 67. File free state taxes only Your spouse would have become age 65 in November 2013. File free state taxes only Because your spouse was under age 65 when she died, you meet the age test. File free state taxes only Rule 12—You Cannot Be the Dependent of Another Person If you are not filing a joint return, you meet this rule if: You checked box 6a on Form 1040 or 1040A, or You did not check the “You” box on line 5 of Form 1040EZ, and you entered $10,000 on that line. File free state taxes only If you are filing a joint return, you meet this rule if: You checked both box 6a and box 6b on Form 1040 or 1040A, or You and your spouse did not check either the “You” box or the “Spouse” box on line 5 of Form 1040EZ, and you entered $20,000 on that line. File free state taxes only If you are not sure whether someone else can claim you as a dependent, get Publication 501 and read the rules for claiming a dependent. File free state taxes only If someone else can claim you as a dependent on his or her return, but does not, you still cannot claim the credit. File free state taxes only Example 1. File free state taxes only In 2013, you were age 25, single, and living at home with your parents. File free state taxes only You worked and were not a student. File free state taxes only You earned $7,500. File free state taxes only Your parents cannot claim you as a dependent. File free state taxes only When you file your return, you claim an exemption for yourself by not checking the You box on line 5 of your Form 1040EZ and by entering $10,000 on that line. File free state taxes only You meet this rule. File free state taxes only You can claim the EIC if you meet all the other requirements. File free state taxes only Example 2. File free state taxes only The facts are the same as in Example 1, except that you earned $2,000. File free state taxes only Your parents can claim you as a dependent but decide not to. File free state taxes only You do not meet this rule. File free state taxes only You cannot claim the credit because your parents could have claimed you as a dependent. File free state taxes only Joint returns. File free state taxes only   You generally cannot be claimed as a dependent by another person if you are married and file a joint return. File free state taxes only   However, another person may be able to claim you as a dependent if you and your spouse file a joint return merely to claim a refund of income tax withheld or estimated tax paid. File free state taxes only But neither you nor your spouse can be claimed as a dependent by another person if you claim the EIC on your joint return. File free state taxes only Example 1—return filed to get refund of tax withheld. File free state taxes only You are 26 years old. File free state taxes only You and your wife live with your parents and had $800 of wages from part-time jobs and no other income. File free state taxes only Neither you nor your wife is required to file a tax return. File free state taxes only You do not have a child. File free state taxes only Taxes were taken out of your pay so you file a joint return only to get a refund of the withheld taxes. File free state taxes only Your parents are not disqualified from claiming an exemption for you just because you filed a joint return. File free state taxes only They can claim exemptions for you and your wife if all the other tests to do so are met. File free state taxes only Example 2—return filed to get EIC. File free state taxes only The facts are the same as in Example 1except no taxes were taken out of your pay. File free state taxes only Also, you and your wife are not required to file a tax return, but you file a joint return to claim an EIC of $63 and get a refund of that amount. File free state taxes only Because claiming the EIC is your reason for filing the return, you are not filing it only to claim a refund of income tax withheld or estimated tax paid. File free state taxes only Your parents cannot claim an exemption for either you or your wife. File free state taxes only Rule 13—You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. File free state taxes only ) if all of the following statements are true. File free state taxes only You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. File free state taxes only Or, you are that person's brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. File free state taxes only You were: Under age 19 at the end of the year and younger than that person (or that person's spouse, if the person files jointly), Under age 24 at the end of the year, a student, and younger than that person (or that person's spouse, if the person files jointly), or Permanently and totally disabled, regardless of age. File free state taxes only You lived with that person in the United States for more than half of the year. File free state taxes only You are not filing a joint return for the year (or are filing a joint return only to claim a refund of withheld income tax or estimated tax paid). File free state taxes only For more details about the tests to be a qualifying child, see Rule 8. File free state taxes only If you are a qualifying child of another taxpayer, you cannot claim the EIC. File free state taxes only This is true even if the person for whom you are a qualifying child does not claim the EIC or meet all of the rules to claim the EIC. File free state taxes only Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). File free state taxes only Example. File free state taxes only You lived with your mother all year. File free state taxes only You are age 26, unmarried, and permanently and totally disabled. File free state taxes only Your only income was from a community center where you went three days a week to answer telephones. File free state taxes only You earned $5,000 for the year and provided more than half of your own support. File free state taxes only Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother for the EIC. File free state taxes only She can claim the EIC if she meets all the other requirements. File free state taxes only Because you are a qualifying child of your mother, you cannot claim the EIC. File free state taxes only This is so even if your mother cannot or does not claim the EIC. File free state taxes only Joint returns. File free state taxes only   You generally cannot be a qualifying child of another taxpayer if you are married and file a joint return. File free state taxes only   However, you may be a qualifying child of another taxpayer if you and your spouse file a joint return merely to claim a refund of income tax withheld or estimated tax paid. File free state taxes only But neither you nor your spouse can be a qualifying child of another taxpayer if you claim the EIC on your joint return. File free state taxes only Child of person not required to file a return. File free state taxes only   You are not the qualifying child of another taxpayer (and so may qualify to claim the EIC) if the person for whom you meet the relationship, age, residency, and joint return tests is not required to file an income tax return and either: Does not file an income tax return, or Files a return only to get a refund of income tax withheld or estimated tax paid. File free state taxes only Example 1—return not required. File free state taxes only You lived all year with your father. File free state taxes only You are 27 years old, unmarried, permanently and totally disabled, and earned $13,000. File free state taxes only You have no other income, no children, and provided more than half of your own support. File free state taxes only Your father had no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. File free state taxes only As a result, you are not your father's qualifying child. File free state taxes only You can claim the EIC if you meet all the other requirements to do so. File free state taxes only Example 2—return filed to get refund of tax withheld. File free state taxes only The facts are the same as in Example 1 except your father had wages of $1,500 and had income tax withheld from his wages. File free state taxes only He files a return only to get a refund of the income tax withheld and does not claim the EIC or any other tax credits or deductions. File free state taxes only As a result, you are not your father's qualifying child. File free state taxes only You can claim the EIC if you meet all the other requirements to do so. File free state taxes only Example 3—return filed to get EIC. File free state taxes only The facts are the same as in Example 2 except your father claimed the EIC on his return. File free state taxes only Since he filed the return to get the EIC, he is not filing it only to get a refund of income tax withheld. File free state taxes only As a result, you are your father's qualifying child. File free state taxes only You cannot claim the EIC. File free state taxes only Rule 14—You Must Have Lived in the United States More Than Half of the Year Your home (and your spouse's, if filing a joint return) must have been in the United States for more than half the year. File free state taxes only If it was not, put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). File free state taxes only United States. File free state taxes only   This means the 50 states and the District of Columbia. File free state taxes only It does not include Puerto Rico or U. File free state taxes only S. File free state taxes only possessions such as Guam. File free state taxes only Homeless shelter. File free state taxes only   Your home can be any location where you regularly live. File free state taxes only You do not need a traditional home. File free state taxes only If you lived in one or more homeless shelters in the United States for more than half the year, you meet this rule. File free state taxes only Military personnel stationed outside the United States. File free state taxes only   U. File free state taxes only S. File free state taxes only military personnel stationed outside the United States on extended active duty (defined in chapter 2) are considered to live in the United States during that duty period for purposes of the EIC. File free state taxes only Chapter 4—Figuring and Claiming the EIC You must meet one more rule to claim the EIC. File free state taxes only You need to know the amount of your earned income to see if you meet the rule in this chapter. File free state taxes only You also need to know that amount to figure your EIC. File free state taxes only Rule 15—Earned Income Limits 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. File free state taxes only Earned Income Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. File free state taxes only Employee pay is earned income only if it is taxable. File free state taxes only Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. File free state taxes only But there is an exception for nontaxable combat pay, which you can choose to include in earned income. File free state taxes only Earned income is explained in detail in Rule 7 in chapter 1. File free state taxes only Figuring earned income. File free state taxes only   If you are self-employed, a statutory employee, or a member of the clergy or a church employee who files Schedule SE (Form 1040), you will figure your earned income when you fill out Part 4 of EIC Worksheet B in the Form 1040 instructions. File free state taxes only   Otherwise, figure your earned income by using the worksheet in Step 5 of the Form 1040 instructions for lines 64a and 64b or the Form 1040A instructions for lines 38a and 38b, or the worksheet in Step 2 of the Form 1040EZ instructions for lines 8a and 8b. File free state taxes only   When using one of those worksheets to figure your earned income, you will start with the amount on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). File free state taxes only You will then reduce that amount by any amount included on that line and described in the following list. File free state taxes only Scholarship or fellowship grants not reported on a Form W-2. File free state taxes only A scholarship or fellowship grant that was not reported to you on a Form W-2 is not considered earned income for the earned income credit. File free state taxes only Inmate's income. File free state taxes only Amounts received for work performed while an inmate in a penal institution are not earned income for the earned income credit. File free state taxes only This includes amounts received for work performed while in a work release program or while in a halfway house. File free state taxes only If you received any amount for work done while an inmate in a penal institution and that amount is included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put “PRI” and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ). File free state taxes only Pension or annuity from deferred compensation plans. File free state taxes only A pension or annuity from a nonqualified deferred compensation plan or a nongovernmental section 457 plan is not considered earned income for the earned income credit. File free state taxes only If you received such an amount and it was included in the total on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ), put “DFC” and the amount on the dotted line next to line 7 (Form 1040), in the space to the left of the entry space for line 7 (Form 1040A), or in the space to the left of line 1 (Form 1040EZ). File free state taxes only This amount may be reported in box 11 of your Form W-2. File free state taxes only If you received such an amount but box 11 is blank, contact your employer for the amount received as a pension or an annuity. File free state taxes only Clergy. File free state taxes only   If you are a member of the clergy who files Schedule SE and the amount on line 2 of that schedule includes an amount that was also re

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File free state taxes only 13. File free state taxes only   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. File free state taxes only It is divided into the following sections. File free state taxes only Cost basis. File free state taxes only Adjusted basis. File free state taxes only Basis other than cost. File free state taxes only Your basis is the amount of your investment in property for tax purposes. File free state taxes only Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. File free state taxes only Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. File free state taxes only If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. File free state taxes only Only the basis allocated to the business or investment use of the property can be depreciated. File free state taxes only Your original basis in property is adjusted (increased or decreased) by certain events. File free state taxes only For example, if you make improvements to the property, increase your basis. File free state taxes only If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. File free state taxes only Keep accurate records of all items that affect the basis of your property. File free state taxes only For more information on keeping records, see chapter 1. File free state taxes only Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. File free state taxes only The cost is the amount you pay in cash, debt obligations, other property, or services. File free state taxes only Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). File free state taxes only In addition, the basis of real estate and business assets may include other items. File free state taxes only Loans with low or no interest. File free state taxes only    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. File free state taxes only You generally have unstated interest if your interest rate is less than the applicable federal rate. File free state taxes only   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. File free state taxes only Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. File free state taxes only If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. File free state taxes only Lump sum purchase. File free state taxes only   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. File free state taxes only Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. File free state taxes only Figure the basis of each asset by multiplying the lump sum by a fraction. File free state taxes only The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. File free state taxes only    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. File free state taxes only Fair market value (FMV). File free state taxes only   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. File free state taxes only Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. File free state taxes only Assumption of mortgage. File free state taxes only   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. File free state taxes only Settlement costs. File free state taxes only   Your basis includes the settlement fees and closing costs you paid for buying the property. File free state taxes only (A fee for buying property is a cost that must be paid even if you buy the property for cash. File free state taxes only ) Do not include fees and costs for getting a loan on the property in your basis. File free state taxes only   The following are some of the settlement fees or closing costs you can include in the basis of your property. File free state taxes only Abstract fees (abstract of title fees). File free state taxes only Charges for installing utility services. File free state taxes only Legal fees (including fees for the title search and preparation of the sales contract and deed). File free state taxes only Recording fees. File free state taxes only Survey fees. File free state taxes only Transfer taxes. File free state taxes only Owner's title insurance. File free state taxes only Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. File free state taxes only   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. File free state taxes only   The following are some of the settlement fees and closing costs you cannot include in the basis of property. File free state taxes only Casualty insurance premiums. File free state taxes only Rent for occupancy of the property before closing. File free state taxes only Charges for utilities or other services related to occupancy of the property before closing. File free state taxes only Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. File free state taxes only Fees for refinancing a mortgage. File free state taxes only Real estate taxes. File free state taxes only   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. File free state taxes only You cannot deduct them as an expense. File free state taxes only    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. File free state taxes only Do not include that amount in the basis of your property. File free state taxes only If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. File free state taxes only Points. File free state taxes only   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. File free state taxes only Generally, you deduct the points over the term of the loan. File free state taxes only For more information on how to deduct points, see chapter 23. File free state taxes only Points on home mortgage. File free state taxes only   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. File free state taxes only If certain requirements are met, you can deduct the points in full for the year in which they are paid. File free state taxes only Reduce the basis of your home by any seller-paid points. File free state taxes only Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. File free state taxes only The result is the adjusted basis. File free state taxes only Increases to Basis Increase the basis of any property by all items properly added to a capital account. File free state taxes only Examples of items that increase basis are shown in Table 13-1. File free state taxes only These include the items discussed below. File free state taxes only Improvements. File free state taxes only   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. File free state taxes only For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. File free state taxes only Assessments for local improvements. File free state taxes only   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. File free state taxes only Do not deduct them as taxes. File free state taxes only However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. File free state taxes only Example. File free state taxes only Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. File free state taxes only Add the assessment to your property's basis. File free state taxes only In this example, the assessment is a depreciable asset. File free state taxes only Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. File free state taxes only Examples of items that decrease basis are shown in Table 13-1. File free state taxes only These include the items discussed below. File free state taxes only Table 13-1. File free state taxes only Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. File free state taxes only   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. File free state taxes only    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. File free state taxes only   For more information on casualty and theft losses, see chapter 25. File free state taxes only Depreciation and section 179 deduction. File free state taxes only   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. File free state taxes only   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. File free state taxes only Example. File free state taxes only You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. File free state taxes only You added an improvement to the duplex that cost $10,000. File free state taxes only In February last year, the duplex was damaged by fire. File free state taxes only Up to that time, you had been allowed depreciation of $23,000. File free state taxes only You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. File free state taxes only You deducted a casualty loss of $1,000 on your income tax return for last year. File free state taxes only You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. File free state taxes only You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. File free state taxes only Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. File free state taxes only Your basis in the land is its original cost of $5,000. File free state taxes only Easements. File free state taxes only   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. File free state taxes only It reduces the basis of the affected part of the property. File free state taxes only If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. File free state taxes only   If the gain is on a capital asset, see chapter 16 for information about how to report it. File free state taxes only If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. File free state taxes only Exclusion of subsidies for energy conservation measures. File free state taxes only   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. File free state taxes only Reduce the basis of the property for which you received the subsidy by the excluded amount. File free state taxes only For more information about this subsidy, see chapter 12. File free state taxes only Postponed gain from sale of home. File free state taxes only    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. File free state taxes only For more information on the rules for the sale of a home, see chapter 15. File free state taxes only Basis Other Than Cost There are many times when you cannot use cost as basis. File free state taxes only In these cases, the fair market value or the adjusted basis of the property can be used. File free state taxes only Fair market value (FMV) and adjusted basis were discussed earlier. File free state taxes only Property Received for Services If you receive property for your services, include the FMV of the property in income. File free state taxes only The amount you include in income becomes your basis. File free state taxes only If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. File free state taxes only Restricted property. File free state taxes only   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. File free state taxes only However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. File free state taxes only Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). File free state taxes only For more information, see Restricted Property in Publication 525. File free state taxes only Bargain purchases. File free state taxes only   A bargain purchase is a purchase of an item for less than its FMV. File free state taxes only If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. File free state taxes only Your basis in the property is its FMV (your purchase price plus the amount you include in income). File free state taxes only   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. File free state taxes only However, your basis in the property is still its FMV. File free state taxes only See Employee Discounts in Publication 15-B. File free state taxes only Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. File free state taxes only A taxable gain or deductible loss also is known as a recognized gain or loss. File free state taxes only If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. File free state taxes only Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. File free state taxes only Similar or related property. File free state taxes only   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. File free state taxes only Decrease the basis by the following. File free state taxes only Any loss you recognize on the involuntary conversion. File free state taxes only Any money you receive that you do not spend on similar property. File free state taxes only Increase the basis by the following. File free state taxes only Any gain you recognize on the involuntary conversion. File free state taxes only Any cost of acquiring the replacement property. File free state taxes only Money or property not similar or related. File free state taxes only    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. File free state taxes only Example. File free state taxes only The state condemned your property. File free state taxes only The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. File free state taxes only You realized a gain of $5,000 ($31,000 − $26,000). File free state taxes only You bought replacement property similar in use to the converted property for $29,000. File free state taxes only You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. File free state taxes only Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. File free state taxes only The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. File free state taxes only   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. File free state taxes only Basis for depreciation. File free state taxes only   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. File free state taxes only For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. File free state taxes only Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. File free state taxes only If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. File free state taxes only See Nontaxable Trades in chapter 14. File free state taxes only Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. File free state taxes only To qualify as a like-kind exchange, the property traded and the property received must be both of the following. File free state taxes only Qualifying property. File free state taxes only Like-kind property. File free state taxes only The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. File free state taxes only If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. File free state taxes only Qualifying property. File free state taxes only   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. File free state taxes only Like-kind property. File free state taxes only   There must be an exchange of like-kind property. File free state taxes only Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. File free state taxes only The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. File free state taxes only Example. File free state taxes only You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. File free state taxes only The dealer allows you $2,000 on the old truck, and you pay $4,800. File free state taxes only This is a like-kind exchange. File free state taxes only The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). File free state taxes only If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). File free state taxes only The basis of the new truck is the price you pay the dealer. File free state taxes only Partially nontaxable exchanges. File free state taxes only   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. File free state taxes only The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. File free state taxes only Decrease the basis by the following amounts. File free state taxes only Any money you receive. File free state taxes only Any loss you recognize on the exchange. File free state taxes only Increase the basis by the following amounts. File free state taxes only Any additional costs you incur. File free state taxes only Any gain you recognize on the exchange. File free state taxes only If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. File free state taxes only Allocation of basis. File free state taxes only   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. File free state taxes only The rest is the basis of the like-kind property. File free state taxes only More information. File free state taxes only   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. File free state taxes only Basis for depreciation. File free state taxes only   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. File free state taxes only For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. File free state taxes only Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. File free state taxes only The same rule applies to a transfer by your former spouse that is incident to divorce. File free state taxes only However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. File free state taxes only If the property transferred to you is a series E, series EE, or series I U. File free state taxes only S. File free state taxes only savings bond, the transferor must include in income the interest accrued to the date of transfer. File free state taxes only Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. File free state taxes only For more information on these bonds, see chapter 7. File free state taxes only At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. File free state taxes only For more information about the transfer of property from a spouse, see chapter 14. File free state taxes only Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. File free state taxes only FMV less than donor's adjusted basis. File free state taxes only   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. File free state taxes only Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. File free state taxes only Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. File free state taxes only See Adjusted Basis , earlier. File free state taxes only Example. File free state taxes only You received an acre of land as a gift. File free state taxes only At the time of the gift, the land had an FMV of $8,000. File free state taxes only The donor's adjusted basis was $10,000. File free state taxes only After you received the property, no events occurred to increase or decrease your basis. File free state taxes only If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. File free state taxes only If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. File free state taxes only If the sales price is between $8,000 and $10,000, you have neither gain nor loss. File free state taxes only Business property. File free state taxes only   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. File free state taxes only FMV equal to or greater than donor's adjusted basis. File free state taxes only   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. File free state taxes only Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. File free state taxes only   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. File free state taxes only See Adjusted Basis , earlier. File free state taxes only   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. File free state taxes only Figure the increase by multiplying the gift tax paid by a fraction. File free state taxes only The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. File free state taxes only   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. File free state taxes only The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. File free state taxes only Example. File free state taxes only In 2013, you received a gift of property from your mother that had an FMV of $50,000. File free state taxes only Her adjusted basis was $20,000. File free state taxes only The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). File free state taxes only She paid a gift tax of $7,320 on the property. File free state taxes only Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . File free state taxes only 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. File free state taxes only If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. File free state taxes only However, your basis cannot exceed the FMV of the gift at the time it was given to you. File free state taxes only Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. File free state taxes only The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. File free state taxes only The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. File free state taxes only The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. File free state taxes only If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. File free state taxes only For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. File free state taxes only Property inherited from a decedent who died in 2010. File free state taxes only   If you inherited property from a decedent who died in 2010, special rules may apply. File free state taxes only For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. File free state taxes only Community property. File free state taxes only   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. File free state taxes only When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. File free state taxes only For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. File free state taxes only Example. File free state taxes only You and your spouse owned community property that had a basis of $80,000. File free state taxes only When your spouse died, half the FMV of the community interest was includible in your spouse's estate. File free state taxes only The FMV of the community interest was $100,000. File free state taxes only The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). File free state taxes only The basis of the other half to your spouse's heirs is also $50,000. File free state taxes only For more information about community property, see Publication 555, Community Property. File free state taxes only Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. File free state taxes only To do so, you must figure its basis for depreciation at the time of the change. File free state taxes only An example of changing property held for personal use to business or rental use would be renting out your former personal residence. File free state taxes only Basis for depreciation. File free state taxes only   The basis for depreciation is the lesser of the following amounts. File free state taxes only The FMV of the property on the date of the change. File free state taxes only Your adjusted basis on the date of the change. File free state taxes only Example. File free state taxes only Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. File free state taxes only You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. File free state taxes only Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. File free state taxes only Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). File free state taxes only On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. File free state taxes only The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). File free state taxes only Sale of property. File free state taxes only   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. File free state taxes only Gain. File free state taxes only   The basis for figuring a gain is your adjusted basis in the property when you sell the property. File free state taxes only Example. File free state taxes only Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. File free state taxes only Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). File free state taxes only Loss. File free state taxes only   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. File free state taxes only Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . File free state taxes only Example. File free state taxes only Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. File free state taxes only In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. File free state taxes only Reduce that amount ($180,000) by the depreciation deductions ($37,500). File free state taxes only The basis for loss is $142,500 ($180,000 − $37,500). File free state taxes only Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. File free state taxes only If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. File free state taxes only You must adjust the basis of stocks for certain events that occur after purchase. File free state taxes only For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. File free state taxes only This rule applies only when the additional stock received is identical to the stock held. File free state taxes only Also reduce your basis when you receive nontaxable distributions. File free state taxes only They are a return of capital. File free state taxes only Example. File free state taxes only In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. File free state taxes only In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. File free state taxes only In 2013 XYZ declared a 2-for-1 stock split. File free state taxes only You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. File free state taxes only Other basis. File free state taxes only   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. File free state taxes only For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. File free state taxes only Identifying stocks or bonds sold. File free state taxes only   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. File free state taxes only If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. File free state taxes only For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. File free state taxes only Mutual fund shares. File free state taxes only   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. File free state taxes only For more information, see Publication 550. File free state taxes only Bond premium. File free state taxes only   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. File free state taxes only See Bond Premium Amortization in chapter 3 of Publication 550 for more information. File free state taxes only Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. File free state taxes only Original issue discount (OID) on debt instruments. File free state taxes only   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. File free state taxes only See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. File free state taxes only Tax-exempt obligations. File free state taxes only    OID on tax-exempt obligations is generally not taxable. File free state taxes only However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. File free state taxes only The accrued OID is added to the basis of the obligation to determine your gain or loss. File free state taxes only See chapter 4 of Publication 550. File free state taxes only Prev  Up  Next   Home   More Online Publications