Sec. 32. Earned income

TITLE 26, Subtitle A, CHAPTER 1, Subchapter A, PART IV, Subpart C, Sec. 32.

STATUTE

(a) Allowance of credit

(1) In general
In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the credit percentage of so much of the taxpayer's earned income for the taxable year as does not exceed the earned income amount.

(2) Limitation
The amount of the credit allowable to a taxpayer under paragraph (1) for any taxable year shall not exceed the excess (if any) of -

(A) the credit percentage of the earned income amount, over

(B) the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds the phaseout amount.

(b) Percentages and amounts
For purposes of subsection (a) -

(1) Percentages
The credit percentage and the phaseout percentage shall be determined as follows:

(A) In general
In the case of taxable years beginning after 1995: In the case of an eligible The credit The
individual with: percentage phaseout
is: percentage
is:

1 qualifying child                   34                        15.98
2 or more qualifying children        40                        21.06
No qualifying children               7.65                       7.65

(B) Transitional percentages for 1995
In the case of taxable years beginning in 1995: In the case of an eligible The credit The
individual with: percentage phaseout
is: percentage
is:

1 qualifying child                   34                        15.98
2 or more qualifying children        36                        20.22
No qualifying children               7.65                       7.65

(C) Transitional percentages for 1994
In the case of a taxable year beginning in 1994: In the case of an eligible The credit The
individual with: percentage phaseout
is: percentage
is:

1 qualifying child                   26.3                      15.98
2 or more qualifying children        30                        17.68
No qualifying children               7.65                       7.65

(2) Amounts

(A) In general
Subject to subparagraph (B), the earned income amount and the phaseout amount shall be determined as follows: In the case of an eligible The earned The
individual with: income amount phaseout
is: amount is:

1 qualifying child                   $6,330                  $11,610
2 or more qualifying children        $8,890                  $11,610
No qualifying children               $4,220                   $5,280

(B) Joint returns
In the case of a joint return filed by an eligible individual and such individual's spouse, the phaseout amount determined under subparagraph (A) shall be increased by -

(i) $1,000 in the case of taxable years beginning in 2002, 2003, and 2004,

(ii) $2,000 in the case of taxable years beginning in 2005, 2006, and 2007, and

(iii) $3,000 in the case of taxable years beginning after 2007.

(c) Definitions and special rules
For purposes of this section -

(1) Eligible individual

(A) In general
The term "eligible individual" means -

(i) any individual who has a qualifying child for the taxable year, or

(ii) any other individual who does not have a qualifying child for the taxable year, if -

(I) such individual's principal place of abode is in the United States for more than one-half of such taxable year,

(II) such individual (or, if the individual is married, either the individual or the individual's spouse) has attained age 25 but not attained age 65 before the close of the taxable year, and

(III) such individual is not a dependent for whom a deduction is allowable under section 151 to another taxpayer for any taxable year beginning in the same calendar year as such taxable year. For purposes of the preceding sentence, marital status shall be determined under section 7703.

(B) Qualifying child ineligible
If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year.

(C) 2 or more claiming qualifying child

(i) In general
Except as provided in clause (ii), if (but for this paragraph) an individual may be claimed, and is claimed, as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is -

(I) a parent of the individual, or

(II) if subclause (I) does not apply, the taxpayer with the highest adjusted gross income for such taxable year.

(ii) More than 1 claiming credit
If the parents claiming the credit with respect to any qualifying child do not file a joint return together, such child shall be treated as the qualifying child of -

(I) the parent with whom the child resided for the longest period of time during the taxable year, or

(II) if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income.

(D) Exception for individual claiming benefits under section
911
The term "eligible individual" does not include any individual who claims the benefits of section 911 (relating to citizens or residents living abroad) for the taxable year.

(E) Limitation on eligibility of nonresident aliens
The term "eligible individual" shall not include any individual who is a nonresident alien individual for any portion of the taxable year unless such individual is treated for such taxable year as a resident of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

(F) Identification number requirement
No credit shall be allowed under this section to an eligible individual who does not include on the return of tax for the taxable year -

(i) such individual's taxpayer identification number, and

(ii) if the individual is married (within the meaning of section 7703), the taxpayer identification number of such individual's spouse.

(G) Individuals who do not include TIN, etc., of any qualifying
child
No credit shall be allowed under this section to any eligible individual who has one or more qualifying children if no qualifying child of such individual is taken into account under subsection (b) by reason of paragraph (3)(D).

(2) Earned income

(A) The term "earned income" means -

(i) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus

(ii) the amount of the taxpayer's net earnings from self-employment for the taxable year (within the meaning of section 1402(a)), but such net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f).

(B) For purposes of subparagraph (A) -

(i) the earned income of an individual shall be computed without regard to any community property laws,

(ii) no amount received as a pension or annuity shall be taken into account,

(iii) no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account,

(iv) no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account, and

(v) no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act shall be taken into account, but only to the extent such amount is subsidized under such State program.

(3) Qualifying child

(A) In general
The term "qualifying child" means, with respect to any taxpayer for any taxable year, an individual -

(i) who bears a relationship to the taxpayer described in subparagraph (B),

(ii) who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, and

(iii) who meets the age requirements of subparagraph (C).

(B) Relationship test

(i) In general
An individual bears a relationship to the taxpayer described in this subparagraph if such individual is -

(I) a son, daughter, stepson, or stepdaughter, or a descendant of any such individual,

(II) a brother, sister, stepbrother, or stepsister, or a descendant of any such individual, who the taxpayer cares for as the taxpayer's own child, or

(III) an eligible foster child of the taxpayer.

(ii) Married children
Clause (i) shall not apply to any individual who is married as of the close of the taxpayer's taxable year unless the taxpayer is entitled to a deduction under section 151 for such taxable year with respect to such individual (or would be so entitled but for paragraph (2) or (4) of section 152(e)).

(iii) Eligible foster child
For purposes of clause (i), the term "eligible foster child" means an individual not described in subclause (I) or (II) of clause (i) who -

(I) is placed with the taxpayer by an authorized placement agency, and

(II) the taxpayer cares for as the taxpayer's own child.

(iv) Adoption
For purposes of this subparagraph, a child who is legally adopted, or who is placed with the taxpayer by an authorized placement agency for adoption by the taxpayer, shall be treated as a child by blood.

(C) Age requirements
An individual meets the requirements of this subparagraph if such individual -

(i) has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins,

(ii) is a student (as defined in section 151(c)(4)) who has not attained the age of 24 as of the close of such calendar year, or

(iii) is permanently and totally disabled (as defined in section 22(e)(3)) at any time during the taxable year.

(D) Identification requirements

(i) In general
A qualifying child shall not be taken into account under subsection (b) unless the taxpayer includes the name, age, and TIN of the qualifying child on the return of tax for the taxable year.

(ii) Other methods
The Secretary may prescribe other methods for providing the information described in clause (i).

(E) Abode must be in the United States
The requirements of subparagraph (A)(ii) shall be met only if the principal place of abode is in the United States.

(4) Treatment of military personnel stationed outside the United
States
For purposes of paragraphs (1)(A)(ii)(I) and (3)(E), the principal place of abode of a member of the Armed Forces of the United States shall be treated as in the United States during any period during which such member is stationed outside the United States while serving on extended active duty with the Armed Forces of the United States. For purposes of the preceding sentence, the term "extended active duty" means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

(d) Married individuals
In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint return is filed for the taxable year under section 6013.

(e) Taxable year must be full taxable year
Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.

(f) Amount of credit to be determined under tables

(1) In general
The amount of the credit allowed by this section shall be determined under tables prescribed by the Secretary.

(2) Requirements for tables
The tables prescribed under paragraph (1) shall reflect the provisions of subsections (a) and (b) and shall have income brackets of not greater than $50 each -

(A) for earned income between $0 and the amount of earned income at which the credit is phased out under subsection (b), and

(B) for adjusted gross income between the dollar amount at which the phaseout begins under subsection (b) and the amount of adjusted gross income at which the credit is phased out under subsection (b).

(g) Coordination with advance payments of earned income credit

(1) Recapture of excess advance payments
If any payment is made to the individual by an employer under section 3507 during any calendar year, then the tax imposed by this chapter for the individual's last taxable year beginning in such calendar year shall be increased by the aggregate amount of such payments.

(2) Reconciliation of payments advanced and credit allowed
Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit (other than the credit allowed by subsection (a)) allowable under this part. [(h) Repealed. Pub. L. 107-16, title III, Sec. 303(c), June 7, 2001, 115 Stat. 55]

(i) Denial of credit for individuals having excessive investment
income

(1) In general
No credit shall be allowed under subsection (a) for the taxable year if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds $2,200.

(2) Disqualified income
For purposes of paragraph (1), the term "disqualified income" means -

(A) interest or dividends to the extent includible in gross income for the taxable year,

(B) interest received or accrued during the taxable year which is exempt from tax imposed by this chapter,

(C) the excess (if any) of -

(i) gross income from rents or royalties not derived in the ordinary course of a trade or business, over

(ii) the sum of -

(I) the deductions (other than interest) which are clearly and directly allocable to such gross income, plus

(II) interest deductions properly allocable to such gross income,

(D) the capital gain net income (as defined in section 1222) of the taxpayer for such taxable year, and

(E) the excess (if any) of -

(i) the aggregate income from all passive activities for the taxable year (determined without regard to any amount included in earned income under subsection (c)(2) or described in a preceding subparagraph), over

(ii) the aggregate losses from all passive activities for the taxable year (as so determined). For purposes of subparagraph (E), the term "passive activity" has the meaning given such term by section 469.

(j) Inflation adjustments

(1) In general
In the case of any taxable year beginning after 1996, each of the dollar amounts in subsections (b)(2) and (i)(1) shall be increased by an amount equal to -

(A) such dollar amount, multiplied by

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined -

(i) in the case of amounts in subsections (b)(2)(A) and (i)(1), by substituting "calendar year 1995" for "calendar year 1992" in subparagraph (B) thereof, and

(ii) in the case of the $3,000 amount in subsection (b)(2)(B)(iii), by substituting "calendar year 2007" for "calendar year 1992" in subparagraph (B) of such section 1.

(2) Rounding

(A) In general
If any dollar amount in subsection (b)(2)(A) (after being increased under subparagraph (B) thereof), after being increased under paragraph (1), is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

(B) Disqualified income threshold amount
If the dollar amount in subsection (i)(1), after being increased under paragraph (1), is not a multiple of $50, such amount shall be rounded to the next lowest multiple of $50.

(k) Restrictions on taxpayers who improperly claimed credit in
prior year

(1) Taxpayers making prior fraudulent or reckless claims

(A) In general
No credit shall be allowed under this section for any taxable year in the disallowance period.

(B) Disallowance period
For purposes of paragraph (1), the disallowance period is -

(i) the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer's claim of credit under this section was due to fraud, and

(ii) the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer's claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud).

(2) Taxpayers making improper prior claims
In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

(l) Coordination with certain means-tested programs
For purposes of -

(1) the United States Housing Act of 1937,

(2) title V of the Housing Act of 1949,

(3) section 101 of the Housing and Urban Development Act of 1965,

(4) sections 221(d)(3), 235, and 236 of the National Housing Act, and

(5) the Food Stamp Act of 1977, any refund made to an individual (or the spouse of an individual) by reason of this section, and any payment made to such individual (or such spouse) by an employer under section 3507, shall not be treated as income (and shall not be taken into account in determining resources for the month of its receipt and the following month).

(m) Identification numbers
Solely for purposes of subsections (c)(1)(F) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration (other than a social security number issued pursuant to clause (II) (or that portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i) of the Social Security Act).

SECTION REFERRED TO IN OTHER SECTIONS

This section is referred to in sections 24, 86, 129, 151, 995, 3507, 6051, 6211, 6213, 6695 of this title; title 2 section 905; title 42 sections 502, 653, 1382a, 1382b.

Web edition produced by John Walker