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2012 Earned Income Tax Credit Eligibility – Tie-breaker rules

Eligibility for the 2012 Earned Income Tax Credit (EITC) is an important issue for many married and individual tax payers. This tax credit (26 USC § 32 – Earned Income) was incorporated into the Internal Tax Revenue Code (IRC) in 1975 to encourage work (earned income) and offset social security taxes especially for those who receive what is described as low- to medium-ranges of income. The amount of the refundable credit, in excess of any personal taxes owed, has increased over the years and is now significantly affected by whether or not a household includes qualifying children.

The test for a qualifying child, namely; relationship, residency, and age, figures prominently in US tax code and especially in determining EITC eligibility. In order to qualify, the child must meet criteria in all three requirements. But what happens when, for example, in a divorce situation, a qualifying child spends half their time with one parent and the rest with the other. Alternatively, neither biological parent cares for a child.  How do you resolve sometimes complicated real-life situations? If two individuals file separate tax returns citing the same child in their claims for EITC or dependency exemptions and some of the criteria match, the IRS provided tie-breaking rules to determine which claim is valid as follows:

  • The parent has a superior claim when considering a qualifying child
  • When parents file separate tax returns, the child’s residency determines eligibility. The parent with whom the child resides longest during a tax year has a valid claim.
  • When a child resides equal lengths of time with each parent, the parent with the highest adjusted gross income (AGI) has the valid claim.
  • When a child resides with individual(s) other than their parent, the taxpayer with the highest AGI has a valid claim.

In general, a taxpayer is responsible for preparing documentation that clearly supports assertions they make about income, expenses, and kin on their annual tax return. Validation of “qualifying child” claims, especially for EITC, is especially important when:

  • The claimed qualifying child is not a son or daughter
  • The taxpayer’s age compared to the claimed child is not consistent with commonsense
  • Young taxpayers claiming a qualifying child may, themselves, be a “qualified child”.
  • Claims involve disabled individuals

EITC is an important provision of the US tax code designed to help offset tax burdens of low- to medium income individuals and households. Unfortunately, an increasing number of these claims are reviewed and sometimes disallowed every year.  Seek professional advice if you receive an IRS notice referencing your tax credit claim.

An easy-to-read user guide explaining the Earned Income Tax Credit (EITC) is available through the IRS website.  More detailed information is available in IRS Publication 596, Earned Income Credit (EIC) 2011. Seek professional advice especially when applying for EITC to ensure you not only receive the maximum tax benefit allowed under the law but also document your claim in the event, at some future time,  you are challenged regarding its legitimacy. You can read about required documents you need to prove an EITC claim in IRS publication, IRS Form 886-H-EIC-2011.