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Late Tax Penalty

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Late Tax Penalty

Late tax penalty 5. Late tax penalty   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. Late tax penalty Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. Late tax penalty Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. Late tax penalty Deduction for employees. Late tax penalty If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee. Late tax penalty Business-use requirement. Late tax penalty If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. Late tax penalty In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. Late tax penalty You may also have to recapture (include in income) any excess depreciation claimed in previous years. Late tax penalty A similar inclusion amount applies to certain leased property. Late tax penalty Passenger automobile limits and rules. Late tax penalty Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. Late tax penalty You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. Late tax penalty This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. Late tax penalty It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. Late tax penalty Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Late tax penalty What Is Listed Property? Listed property is any of the following. Late tax penalty Passenger automobiles (as defined later). Late tax penalty Any other property used for transportation, unless it is an excepted vehicle. Late tax penalty Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). Late tax penalty Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. Late tax penalty A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587. Late tax penalty Improvements to listed property. Late tax penalty   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. Late tax penalty The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. Late tax penalty For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method. Late tax penalty Passenger Automobiles A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). Late tax penalty It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. Late tax penalty The following vehicles are not considered passenger automobiles for these purposes. Late tax penalty An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. Late tax penalty A vehicle used directly in the trade or business of transporting persons or property for pay or hire. Late tax penalty A truck or van that is a qualified nonpersonal use vehicle. Late tax penalty Qualified nonpersonal use vehicles. Late tax penalty   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Late tax penalty They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. Late tax penalty They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Late tax penalty For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. Late tax penalty Other Property Used for Transportation Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property. Late tax penalty Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. Late tax penalty Excepted vehicles. Late tax penalty   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). Late tax penalty Clearly marked police and fire vehicles. Late tax penalty Unmarked vehicles used by law enforcement officers if the use is officially authorized. Late tax penalty Ambulances used as such and hearses used as such. Late tax penalty Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. Late tax penalty Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. Late tax penalty Combines, cranes and derricks, and forklifts. Late tax penalty Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. Late tax penalty Qualified moving vans. Late tax penalty Qualified specialized utility repair trucks. Late tax penalty School buses used in transporting students and employees of schools. Late tax penalty Other buses with a capacity of at least 20 passengers that are used as passenger buses. Late tax penalty Tractors and other special purpose farm vehicles. Late tax penalty Clearly marked police and fire vehicle. Late tax penalty   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. Late tax penalty It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. Late tax penalty It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times. Late tax penalty It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency. Late tax penalty It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. Late tax penalty A marking on a license plate is not a clear marking for these purposes. Late tax penalty Qualified moving van. Late tax penalty   A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met. Late tax penalty No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another. Late tax penalty Personal use for travel to and from a move site happens no more than five times a month on average. Late tax penalty Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. Late tax penalty Qualified specialized utility repair truck. Late tax penalty   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. Late tax penalty The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. Late tax penalty Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes. Late tax penalty The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. Late tax penalty Computers and Related Peripheral Equipment A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. Late tax penalty It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Late tax penalty Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Late tax penalty The following are neither computers nor related peripheral equipment. Late tax penalty Any equipment that is an integral part of other property that is not a computer. Late tax penalty Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. Late tax penalty Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. Late tax penalty Can Employees Claim a Deduction? If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. Late tax penalty The use of your property in performing services as an employee is a business use only if both the following requirements are met. Late tax penalty The use is for your employer's convenience. Late tax penalty The use is required as a condition of your employment. Late tax penalty If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee. Late tax penalty Employer's convenience. Late tax penalty   Whether the use of listed property is for your employer's convenience must be determined from all the facts. Late tax penalty The use is for your employer's convenience if it is for a substantial business reason of the employer. Late tax penalty The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. Late tax penalty Condition of employment. Late tax penalty   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. Late tax penalty The use of property must be required for you to perform your duties properly. Late tax penalty Your employer does not have to require explicitly that you use the property. Late tax penalty However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. Late tax penalty Example 1. Late tax penalty Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. Late tax penalty She owns and uses a motorcycle to deliver packages to downtown offices. Late tax penalty We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Late tax penalty Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Late tax penalty Example 2. Late tax penalty Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Late tax penalty He must travel to these sites on a regular basis. Late tax penalty Uplift does not furnish an automobile or explicitly require him to use his own automobile. Late tax penalty However, it pays him for any costs he incurs in traveling to the various sites. Late tax penalty The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Late tax penalty Example 3. Late tax penalty Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. Late tax penalty The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. Late tax penalty Example 4. Late tax penalty Marilyn Lee is a pilot for Y Company, a small charter airline. Late tax penalty Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Late tax penalty Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Late tax penalty Marilyn owns her own airplane. Late tax penalty The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment. Late tax penalty Example 5. Late tax penalty David Rule is employed as an engineer with Zip, an engineering contracting firm. Late tax penalty He occasionally takes work home at night rather than work late in the office. Late tax penalty He owns and uses a home computer which is virtually identical to the office model. Late tax penalty His use of the computer is neither for the convenience of his employer nor required as a condition of employment. Late tax penalty What Is the Business-Use Requirement? You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. Late tax penalty To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. Late tax penalty If this requirement is not met, the following rules apply. Late tax penalty Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. Late tax penalty Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. Late tax penalty Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. Late tax penalty This rule applies each year of the recovery period. Late tax penalty Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use. Late tax penalty A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use. Late tax penalty Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. Late tax penalty It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Late tax penalty Exception for leased property. Late tax penalty   The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Late tax penalty   You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. Late tax penalty This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. Late tax penalty Occasional or incidental leasing activity is insufficient. Late tax penalty For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. Late tax penalty An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Late tax penalty How To Allocate Use To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. Late tax penalty For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Late tax penalty You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year. Late tax penalty For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). Late tax penalty For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year. Late tax penalty Entertainment use. Late tax penalty   Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense. Late tax penalty Commuting use. Late tax penalty   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. Late tax penalty For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. Late tax penalty This is also true for a business meeting held in a car while commuting to work. Late tax penalty Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. Late tax penalty The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use. Late tax penalty Use of your automobile by another person. Late tax penalty   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. Late tax penalty That use is directly connected with your business. Late tax penalty You properly report the value of the use as income to the other person and withhold tax on the income where required. Late tax penalty You are paid a fair market rent. Late tax penalty Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). Late tax penalty Employee deductions. Late tax penalty   If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. Late tax penalty See Can Employees Claim a Deduction , earlier. Late tax penalty Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. Late tax penalty However, it does not include the following uses. Late tax penalty The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property). Late tax penalty The use of property as pay for the services of a 5% owner or related person. Late tax penalty The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required. Late tax penalty Property does not stop being used predominantly for qualified business use because of a transfer at death. Late tax penalty Exception for leasing or compensatory use of aircraft. Late tax penalty   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. Late tax penalty 5% owner. Late tax penalty   For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. Late tax penalty   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. Late tax penalty More than 5% of the outstanding stock of the corporation. Late tax penalty Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Late tax penalty Related persons. Late tax penalty   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . Late tax penalty For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Late tax penalty Examples. Late tax penalty   The following examples illustrate whether the use of business property is qualified business use. Late tax penalty Example 1. Late tax penalty John Maple is the sole proprietor of a plumbing contracting business. Late tax penalty John employs his brother, Richard, in the business. Late tax penalty As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. Late tax penalty The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. Late tax penalty The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. Late tax penalty Example 2. Late tax penalty John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. Late tax penalty He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. Late tax penalty This use of company automobiles by employees is not a qualified business use. Late tax penalty Example 3. Late tax penalty James Company Inc. Late tax penalty owns several automobiles that its employees use for business purposes. Late tax penalty The employees also are allowed to take the automobiles home at night. Late tax penalty The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. Late tax penalty This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. Late tax penalty Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. Late tax penalty However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. Late tax penalty Example 1. Late tax penalty Sarah Bradley uses a home computer 50% of the time to manage her investments. Late tax penalty She also uses the computer 40% of the time in her part-time consumer research business. Late tax penalty Sarah's home computer is listed property because it is not used at a regular business establishment. Late tax penalty She does not use the computer predominantly for qualified business use. Late tax penalty Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. Late tax penalty She must depreciate it using the straight line method over the ADS recovery period. Late tax penalty Her combined business/investment use for determining her depreciation deduction is 90%. Late tax penalty Example 2. Late tax penalty If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. Late tax penalty She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. Late tax penalty Her combined business/investment use for determining her depreciation deduction is 90%. Late tax penalty Recapture of Excess Depreciation If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. Late tax penalty You also increase the adjusted basis of your property by the same amount. Late tax penalty Excess depreciation is: The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service. Late tax penalty To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. Late tax penalty Example. Late tax penalty In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. Late tax penalty She used it only for qualified business use for 2009 through 2012. Late tax penalty Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. Late tax penalty She began depreciating it using the 200% DB method over a 5-year GDS recovery period. Late tax penalty The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. Late tax penalty During 2013, she used the truck 50% for business and 50% for personal purposes. Late tax penalty She includes $4,018 excess depreciation in her gross income for 2013. Late tax penalty The excess depreciation is determined as follows. Late tax penalty Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. Late tax penalty (Depreciation is from Table A-1. Late tax penalty ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. Late tax penalty The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. Late tax penalty Where to figure and report recapture. Late tax penalty   Use Form 4797, Part IV, to figure the recapture amount. Late tax penalty Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. Late tax penalty For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. Late tax penalty If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. Late tax penalty Lessee's Inclusion Amount If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Late tax penalty Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). Late tax penalty For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. Late tax penalty The inclusion amount is the sum of Amount A and Amount B, described next. Late tax penalty However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year. Late tax penalty Amount A. Late tax penalty   Amount A is: The fair market value of the property, multiplied by The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in Appendix A . Late tax penalty   The fair market value of the property is the value on the first day of the lease term. Late tax penalty If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value. Late tax penalty Amount B. Late tax penalty   Amount B is: The fair market value of the property, multiplied by The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A–20 in Appendix A . Late tax penalty Maximum inclusion amount. Late tax penalty   The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income. Late tax penalty Inclusion amount worksheet. Late tax penalty   The following worksheet is provided to help you figure the inclusion amount for leased listed property. Late tax penalty Inclusion Amount Worksheet for Leased Listed Property 1. Late tax penalty Fair market value   2. Late tax penalty Business/investment use for first year business use is 50% or less   3. Late tax penalty Multiply line 1 by line 2. Late tax penalty   4. Late tax penalty Rate (%) from Table A-19   5. Late tax penalty Multiply line 3 by line 4. Late tax penalty This is Amount A. Late tax penalty   6. Late tax penalty Fair market value   7. Late tax penalty Average business/investment use for years property leased before the first year business use is 50% or less . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty . Late tax penalty   8. Late tax penalty Multiply line 6 by line 7   9. Late tax penalty Rate (%) from Table A-20   10. Late tax penalty Multiply line 8 by line 9. Late tax penalty This is Amount B. Late tax penalty   11. Late tax penalty Add line 5 and line 10. Late tax penalty This is your inclusion amount. Late tax penalty Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Late tax penalty )         Example. Late tax penalty On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. Late tax penalty The lease is for a period of 5 years. Late tax penalty Larry does not use the computer at a regular business establishment, so it is listed property. Late tax penalty His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. Late tax penalty He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. Late tax penalty The computer has a 5-year recovery period under both GDS and ADS. Late tax penalty 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. Late tax penalty 8%. Late tax penalty The applicable percentage from Table A-20 is 22. Late tax penalty 0%. Late tax penalty Larry's deductible rent for the computer for 2013 is $800. Late tax penalty Larry uses the Inclusion amount worksheet. Late tax penalty to figure the amount he must include in income for 2013. Late tax penalty His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). Late tax penalty Inclusion Amount Worksheet for Leased Listed Property 1. Late tax penalty Fair market value $3,000   2. Late tax penalty Business/investment use for first year business use is 50% or less 40 % 3. Late tax penalty Multiply line 1 by line 2. Late tax penalty 1,200   4. Late tax penalty Rate (%) from Table A-19 −19. Late tax penalty 8 % 5. Late tax penalty Multiply line 3 by line 4. Late tax penalty This is Amount A. Late tax penalty −238   6. Late tax penalty Fair market value 3,000   7. Late tax penalty Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. Late tax penalty Multiply line 6 by line 7 2,100   9. Late tax penalty Rate (%) from Table A-20 22. Late tax penalty 0 % 10. Late tax penalty Multiply line 8 by line 9. Late tax penalty This is Amount B. Late tax penalty 462   11. Late tax penalty Add line 5 and line 10. Late tax penalty This is your inclusion amount. Late tax penalty Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Late tax penalty ) $224           Lease beginning in the last 9 months of your tax year. Late tax penalty    The inclusion amount is subject to a special rule if all the following apply. Late tax penalty The lease term begins within 9 months before the close of your tax year. Late tax penalty You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. Late tax penalty The lease term continues into your next tax year. Late tax penalty Under this special rule, add the inclusion amount to income in the next tax year. Late tax penalty Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Late tax penalty Skip lines 6 through 9 of the worksheet and enter zero on line 10. Late tax penalty Example 1. Late tax penalty On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. Late tax penalty The property is 5-year property with a fair market value of $10,000. Late tax penalty Her property has a recovery period of 5 years under ADS. Late tax penalty The lease is for 5 years. Late tax penalty Her business use of the property was 50% in 2012 and 90% in 2013. Late tax penalty She paid rent of $3,600 for 2012, of which $3,240 is deductible. Late tax penalty She must include $147 in income in 2013. Late tax penalty The $147 is the sum of Amount A and Amount B. Late tax penalty Amount A is $147 ($10,000 × 70% × 2. Late tax penalty 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . Late tax penalty Amount B is zero. Late tax penalty Lease for less than one year. Late tax penalty   A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. Late tax penalty The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. Late tax penalty The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). Late tax penalty   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. Late tax penalty If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease. Late tax penalty Example 2. Late tax penalty On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. Late tax penalty This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. Late tax penalty The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. Late tax penalty He must include $71 in income in 2013. Late tax penalty The $71 is the sum of Amount A and Amount B. Late tax penalty Amount A is $71 ($15,000 × 45% × 2. Late tax penalty 1% × 183/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19 , prorated for the length of the lease. Late tax penalty Amount B is zero. Late tax penalty Where to report inclusion amount. Late tax penalty   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. Late tax penalty For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. Late tax penalty If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. Late tax penalty Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. Late tax penalty This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. Late tax penalty Exception for leased cars. Late tax penalty   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. Late tax penalty For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property , earlier, under What Is the Business-Use Requirement . Late tax penalty Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. Late tax penalty They are based on the date you placed the automobile in service. Late tax penalty Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. Late tax penalty Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Late tax penalty 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. Late tax penalty 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. Late tax penalty 4If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. Late tax penalty 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. Late tax penalty If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Late tax penalty 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Late tax penalty If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year. Late tax penalty If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. Late tax penalty The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. Late tax penalty Example. Late tax penalty On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. Late tax penalty She used the car only in her business. Late tax penalty She files her tax return based on the calendar year. Late tax penalty She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Late tax penalty Under MACRS, a car is 5-year property. Late tax penalty Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Late tax penalty Virginia multiplies the $14,500 unadjusted basis of her car by 0. Late tax penalty 20 to get her MACRS depreciation of $2,900 for 2013. Late tax penalty This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. Late tax penalty She can deduct the full $2,900. Late tax penalty Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. Late tax penalty The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. Late tax penalty Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. Late tax penalty Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. Late tax penalty 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. Late tax penalty If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Late tax penalty 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Late tax penalty Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. Late tax penalty The maximum deduction amounts for trucks and vans are shown in the following table. Late tax penalty Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. Late tax penalty 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. Late tax penalty 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Late tax penalty 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. Late tax penalty 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. Late tax penalty 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, or the maximum deduction is $3,260. Late tax penalty 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. Late tax penalty If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Late tax penalty 8 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Late tax penalty Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. Late tax penalty Then use the information from this worksheet to prepare Form 4562. Late tax penalty Depreciation Worksheet for Passenger Automobiles   Part I   1. Late tax penalty MACRS system (GDS or ADS)     2. Late tax penalty Property class     3. Late tax penalty Date placed in service     4. Late tax penalty Recovery period     5. Late tax penalty Method and convention     6. Late tax penalty Depreciation rate (from tables)     7. Late tax penalty Maximum depreciation deduction for this year from the appropriate table       8. Late tax penalty Business/investment-use percentage       9. Late tax penalty Multiply line 7 by line 8. Late tax penalty This is your adjusted maximum depreciation deduction       10. Late tax penalty Section 179 deduction claimed this year (not more than line 9). Late tax penalty Enter -0- if this is not the year you placed the car in service. Late tax penalty         Note. Late tax penalty  1) If line 10 is equal to line 9, stop here. Late tax penalty Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. Late tax penalty  2) If line 10 is less than line 9, complete Part II. Late tax penalty   Part II   11. Late tax penalty Subtract line 10 from line 9. Late tax penalty This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. Late tax penalty Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. Late tax penalty Multiply line 12 by line 8. Late tax penalty This is your business/investment cost       14. Late tax penalty Section 179 deduction claimed in the year you placed the car in service       15. Late tax penalty Subtract line 14 from line 13. Late tax penalty This is your tentative basis for depreciation       16. Late tax penalty Multiply line 15 by . Late tax penalty 50 if the 50% special depreciation allowance applies. Late tax penalty This is your special depreciation allowance. Late tax penalty Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. Late tax penalty Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. Late tax penalty  2) If line 16 is less than line 11, complete Part III. Late tax penalty   Part III   17. Late tax penalty Subtract line 16 from 11. Late tax penalty This is the limit on the amount you can deduct for MACRS depreciation       18. Late tax penalty Subtract line 16 from line 15. Late tax penalty This is your basis for depreciation. Late tax penalty       19. Late tax penalty Multiply line 18 by line 6. Late tax penalty This is your tentative MACRS depreciation deduction. Late tax penalty       20. Late tax penalty Enter the lesser of line 17 or line 19. Late tax penalty This is your MACRS depreciation deduction. Late tax penalty     1 When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your car. Late tax penalty 2 Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount. Late tax penalty             Deductions After the Recovery Period If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. Late tax penalty If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. Late tax penalty You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. Late tax penalty The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. Late tax penalty See Maximum Depreciation Deduction , earlier. Late tax penalty Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied. Late tax penalty You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. Late tax penalty There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period. Late tax penalty Example. Late tax penalty In May 2007, you bought and placed in service a car costing $31,500. Late tax penalty The car was 5-year property under GDS (MACRS). Late tax penalty You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Late tax penalty You used the car exclusively for business during the recovery period (2007 through 2012). Late tax penalty You figured your depreciation as shown below. Late tax penalty Year Percentage Amount Limit   Allowed 2007 20. Late tax penalty 0% $6,300 $2,960   $2,960 2008 32. Late tax penalty 0 10,080 4,800   4,800 2009 19. Late tax penalty 2 6,048 2,850   2,850 2010 11. Late tax penalty 52 3,629 1,675   1,675 2011 11. Late tax penalty 52 3,629 1,675   1,675 2012 5. Late tax penalty 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). Late tax penalty If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. Late tax penalty If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. Late tax penalty However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. Late tax penalty For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. Late tax penalty Deductions For Passenger Automobiles Acquired in a Trade-in If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. Late tax penalty Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. Late tax penalty This excess basis is the additional cash paid for the new automobile in the trade-in. Late tax penalty The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. Late tax penalty Special rules apply in determining the passenger automobile limits. Late tax penalty These rules and examples are discussed in section 1. Late tax penalty 168(i)-6(d)(3) of the regulations. Late tax penalty Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. Late tax penalty For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1. Late tax penalty 168(i)-6(i) and 1. Late tax penalty 168(i)-6(j) of the regulations. Late tax penalty What Records Must Be Kept? You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. Late tax penalty For listed property, you must keep records for as long as any recapture can still occur. Late tax penalty Recapture can occur in any tax year of the recovery period. Late tax penalty Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Late tax penalty You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. Late tax penalty However, your records should back up your receipts in an orderly manner. Late tax penalty Elements of expenditure or use. Late tax penalty   Your records or other documentary evidence must support all the following. Late tax penalty The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses. Late tax penalty The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year. Late tax penalty The date of the expenditure or use. Late tax penalty The business or investment purpose for the expenditure or use. Late tax penalty   Written documents of your expenditure or use are generally better evidence than oral statements alone. Late tax penalty You do not have to keep a daily log. Late tax penalty However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later. Late tax penalty Timeliness. Late tax penalty   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. Late tax penalty An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business: The statement is given by an employee to the employer, or The statement is given by an independent contractor to the client or customer. Late tax penalty   For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use. Late tax penalty Business purpose supported. Late tax penalty   Generally, an adequate record of business purpose must be in the form of a written statement. Late tax penalty However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. Late tax penalty A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Late tax penalty For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Late tax penalty Business use supported. Late tax penalty   An adequate record contains enough information on each element of every business or investment use. Late tax penalty The amount of detail required to support the use depends on the facts and circumstances. Late tax penalty For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Late tax penalty   Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program. Late tax penalty Separate or combined expenditures or uses. Late tax penalty   Each use by you normally is considered a separate use. Late tax penalty However, you can combine repeated uses as a single item. Late tax penalty   Record each expenditure as a separate item. Late tax penalty Do not combine it with other expenditures. Late tax penalty If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. Late tax penalty If you combine these expenses, you do not need to support the business purpose of each expense. Late tax penalty Instead, you can divide the expenses based on the total business use of the listed property. Late tax penalty   You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. Late tax penalty For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. Late tax penalty You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. Late tax penalty Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Late tax penalty Confidential information. Late tax penalty   If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. Late tax penalty You must keep it elsewhere and make it available as support to the IRS director for your area on request. Late tax penalty Substantial compliance. Late tax penalty   If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate. Late tax penalty   If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows. Late tax penalty By your own oral or written statement containing detailed information as to the element. Late tax penalty By other evidence sufficient to establish the element. Late tax penalty   If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Late tax penalty If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Late tax penalty Sampling. Late tax penalty   You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year. Late tax penalty Example 1. Late tax penalty Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. Late tax penalty She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. Late tax penalty There is no other business use of the automobile, but she and family members also use it for personal purposes. Late tax penalty She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. Late tax penalty Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. Late tax penalty If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Late tax penalty Example 2. Late tax penalty Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. Late tax penalty Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. Late tax penalty The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Late tax penalty Example 3. Late tax penalty Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. Late tax penalty For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. Late tax penalty During these weeks, his business use of the automobile does not follow a consistent pattern. Late tax penalty During the fourth week of each month, he delivers all business orders taken during the previous month. Late tax penalty The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. Late tax penalty The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods. Late tax penalty Loss of records. Late tax penalty   When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Late tax penalty How Is Listed Property Information Reported? You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions. Late tax penalty Any deduction for a vehicle. Late tax penalty A depreciation deduction for any other listed property. Late tax penalty If you claim any deduction for a vehicle, you also must provide the information requested in Section B. Late tax penalty If you provide the vehicle for your employee's use, the employee must give you this information. Late tax penalty If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle. Late tax penalty Vehicles used by your employees. Late tax penalty   You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements. Late tax penalty You maintain a written policy statement that prohibits one of the following uses of the vehicles. Late tax penalty All personal use including commuting. Late tax penalty Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. Late tax penalty You treat all use of the vehicles by your employees as personal use. Late tax penalty You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees. Late tax penalty For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions. Late tax penalty Exceptions. Late tax penalty   If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. Late tax penalty Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562. Late tax penalty Prev  Up  Next   Home   More Online Publications
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The Late Tax Penalty

Late tax penalty 36. Late tax penalty   Earned Income Credit (EIC) Table of Contents What's New Reminders Introduction Useful Items - You may want to see: Do You Qualify for the Credit?If Improper Claim Made in Prior Year Part A. Late tax penalty Rules for EveryoneRule 1. Late tax penalty Your AGI Must Be Less Than: Rule 2. Late tax penalty You Must Have a Valid Social Security Number (SSN) Rule 3. Late tax penalty Your Filing Status Cannot Be Married Filing Separately Rule 4. Late tax penalty You Must Be a U. Late tax penalty S. Late tax penalty Citizen or Resident Alien All Year Rule 5. Late tax penalty You Cannot File Form 2555 or Form 2555-EZ Rule 6. Late tax penalty Your Investment Income Must Be $3,300 or Less Rule 7. Late tax penalty You Must Have Earned Income Part B. Late tax penalty Rules If You Have a Qualifying ChildRule 8. Late tax penalty Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9. Late tax penalty Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC Rule 10. Late tax penalty You Cannot Be a Qualifying Child of Another Taxpayer Part C. Late tax penalty Rules If You Do Not Have a Qualifying ChildRule 11. Late tax penalty You Must Be at Least Age 25 but Under Age 65 Rule 12. Late tax penalty You Cannot Be the Dependent of Another Person Rule 13. Late tax penalty You Cannot Be a Qualifying Child of Another Taxpayer Rule 14. Late tax penalty You Must Have Lived in the United States More Than Half of the Year Part D. Late tax penalty Figuring and Claiming the EICRule 15. Late tax penalty Your Earned Income Must Be Less Than: IRS Will Figure the EIC for You How To Figure the EIC Yourself ExamplesExample 1. Late tax penalty John and Janet Smith (Form 1040A) Example 2. Late tax penalty Kelly Green (Form 1040EZ) What's New Earned income amount is more. Late tax penalty  The maximum amount of income you can earn and still get the credit has increased. Late tax penalty You may be able to take the credit if: You have three or more qualifying children and you earned less than $46,227 ($51,567 if married filing jointly), You have two qualifying children and you earned less than $43,038 ($48,378 if married filing jointly), You have one qualifying child and you earned less than $37,870 ($43,210 if married filing jointly), or You do not have a qualifying child and you earned less than $14,340 ($19,680 if married filing jointly). Late tax penalty Your adjusted gross income also must be less than the amount in the above list that applies to you. Late tax penalty For details, see Rules 1 and 15. Late tax penalty Investment income amount is more. Late tax penalty  The maximum amount of investment income you can have and still get the credit has increased to $3,300. Late tax penalty See Rule 6. Late tax penalty Reminders Increased EIC on certain joint returns. Late tax penalty  A married person filing a joint return may get more EIC than someone with the same income but a different filing status. Late tax penalty As a result, the EIC table has different columns for married persons filing jointly than for everyone else. Late tax penalty When you look up your EIC in the EIC Table, be sure to use the correct column for your filing status and the number of children you have. Late tax penalty Online help. Late tax penalty  You can use the EITC Assistant at www. Late tax penalty irs. Late tax penalty gov/eitc to find out if you are eligible for the credit. Late tax penalty The EITC Assistant is available in English and Spanish. Late tax penalty EIC questioned by IRS. Late tax penalty  The IRS may ask you to provide documents to prove you are entitled to claim the EIC. Late tax penalty We will tell you what documents to send us. Late tax penalty These may include: birth certificates, school records, medical records, etc. Late tax penalty The process of establishing your eligibility will delay your refund. Late tax penalty Introduction The earned income credit (EIC) is a tax credit for certain people who work and have less than $51,567 of earned income. Late tax penalty A tax credit usually means more money in your pocket. Late tax penalty It reduces the amount of tax you owe. Late tax penalty The EIC may also give you a refund. Late tax penalty How do you get the earned income credit?   To claim the EIC, you must: Qualify by meeting certain rules, and File a tax return, even if you: Do not owe any tax, Did not earn enough money to file a return, or Did not have income taxes withheld from your pay. Late tax penalty When you complete your return, you can figure your EIC by using a worksheet in the instructions for Form 1040, Form 1040A, or Form 1040EZ. Late tax penalty Or, if you prefer, you can let the IRS figure the credit for you. Late tax penalty How will this chapter help you?   This chapter will explain the following. Late tax penalty The rules you must meet to qualify for the EIC. Late tax penalty How to figure the EIC. Late tax penalty Useful Items - You may want to see: Publication 596 Earned Income Credit (EIC) Form (and Instructions) Schedule EIC Earned Income Credit (Qualifying Child Information) 8862 Information To Claim Earned Income Credit After Disallowance Do You Qualify for the Credit? To qualify to claim the EIC, you must first meet all of the rules explained in Part A, Rules for Everyone . Late tax penalty Then you must meet the rules in Part B, Rules If You Have a Qualifying Child , or Part C, Rules If You Do Not Have a Qualifying Child . Late tax penalty There is one final rule you must meet in Part D, Figuring and Claiming the EIC . Late tax penalty You qualify for the credit if you meet all the rules in each part that applies to you. Late tax penalty If you have a qualifying child, the rules in Parts A, B, and D apply to you. Late tax penalty If you do not have a qualifying child, the rules in Parts A, C, and D apply to you. Late tax penalty Table 36-1, Earned Income Credit in a Nutshell. Late tax penalty   Use Table 36–1 as a guide to Parts A, B, C, and D. Late tax penalty The table is a summary of all the rules in each part. Late tax penalty Do you have a qualifying child?   You have a qualifying child only if you have a child who meets the four tests described in Rule 8 and illustrated in Figure 36–1. Late tax penalty If Improper Claim Made in Prior Year If your EIC for any year after 1996 was denied or reduced for any reason other than a math or clerical error, you must attach a completed Form 8862 to your next tax return to claim the EIC. Late tax penalty You must also qualify to claim the EIC by meeting all the rules described in this chapter. Late tax penalty However, if your EIC was denied or reduced as a result of a math or clerical error, do not attach Form 8862 to your next tax return. Late tax penalty For example, if your arithmetic is incorrect, the IRS can correct it. Late tax penalty If you do not provide a correct social security number, the IRS can deny the EIC. Late tax penalty These kinds of errors are called math or clerical errors. Late tax penalty If your EIC for any year after 1996 was denied and it was determined that your error was due to reckless or intentional disregard of the EIC rules, then you cannot claim the EIC for the next 2 years. Late tax penalty If your error was due to fraud, then you cannot claim the EIC for the next 10 years. Late tax penalty More information. Late tax penalty   See chapter 5 in Publication 596 for more detailed information about the disallowance period and Form 8862. Late tax penalty Part A. Late tax penalty Rules for Everyone This part of the chapter discusses Rules 1 through 7. Late tax penalty You must meet all seven rules to qualify for the earned income credit. Late tax penalty If you do not meet all seven rules, you cannot get the credit and you do not need to read the rest of the chapter. Late tax penalty If you meet all seven rules in this part, then read either Part B or Part C (whichever applies) for more rules you must meet. Late tax penalty Rule 1. Late tax penalty Your 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. Late tax penalty Adjusted gross income (AGI). Late tax penalty   AGI is the amount on line 38 (Form 1040), line 22 (Form 1040A), or line 4 (Form 1040EZ). Late tax penalty If your AGI is equal to or more than the applicable limit listed above, you cannot claim the EIC. Late tax penalty Example. Late tax penalty Your AGI is $38,550, you are single, and you have one qualifying child. Late tax penalty You cannot claim the EIC because your AGI is not less than $37,870. Late tax penalty 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. Late tax penalty Community property. Late tax penalty   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. Late tax penalty This is different from the community property rules that apply under Rule 7 . Late tax penalty Rule 2. Late tax penalty 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). Late tax penalty Any qualifying child listed on Schedule EIC also must have a valid SSN. Late tax penalty (See Rule 8 if you have a qualifying child. Late tax penalty ) 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. Late tax penalty An example of a federally funded benefit is Medicaid. Late tax penalty 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. Late tax penalty S. Late tax penalty citizen or permanent resident, ask the SSA for a new social security card without the legend. Late tax penalty U. Late tax penalty S. Late tax penalty citizen. Late tax penalty   If you were a U. Late tax penalty S. Late tax penalty citizen when you received your SSN, you have a valid SSN. Late tax penalty Valid for work only with INS or DHS authorization. Late tax penalty   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. Late tax penalty SSN missing or incorrect. Late tax penalty   If an SSN for you or your spouse is missing from your tax return or is incorrect, you may not get the EIC. Late tax penalty Other taxpayer identification number. Late tax penalty   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). Late tax penalty ITINs are issued by the Internal Revenue Service to noncitizens who cannot get an SSN. Late tax penalty No SSN. Late tax penalty   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). Late tax penalty You cannot claim the EIC. Late tax penalty Getting an SSN. Late tax penalty   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, Application for a Social Security Card, with the SSA. Late tax penalty You can get Form SS-5 online at www. Late tax penalty socialsecurity. Late tax penalty gov, from your local SSA office, or by calling the SSA at 1-800-772-1213. Late tax penalty Filing deadline approaching and still no SSN. Late tax penalty   If the filing deadline is approaching and you still do not have an SSN, you have two choices. Late tax penalty Request an automatic 6-month extension of time to file your return. Late tax penalty You can get this extension by filing Form 4868, Application for Automatic Extension of Time to File U. Late tax penalty S. Late tax penalty Individual Income Tax Return. Late tax penalty For more information, see chapter 1 . Late tax penalty File the return on time without claiming the EIC. Late tax penalty After receiving the SSN, file an amended return (Form 1040X, Amended U. Late tax penalty S. Late tax penalty Individual Income Tax Return) claiming the EIC. Late tax penalty Attach a filled-in Schedule EIC if you have a qualifying child. Late tax penalty Table 36-1. Late tax penalty Earned Income Credit in a Nutshell First, you must meet all the rules in this column. Late tax penalty Second, you must meet all the rules in one of these columns, whichever applies. Late tax penalty Third, you must meet the rule in this column. Late tax penalty Part A. Late tax penalty  Rules for Everyone Part B. Late tax penalty  Rules If You Have a Qualifying Child Part C. Late tax penalty  Rules If You Do Not Have a Qualifying Child Part D. Late tax penalty  Figuring and Claiming the EIC 1. Late tax penalty 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. Late tax penalty 2. Late tax penalty You must have a valid social security number. Late tax penalty  3. Late tax penalty Your filing status cannot be “Married filing separately. Late tax penalty ” 4. Late tax penalty You must be a U. Late tax penalty S. Late tax penalty citizen or resident alien all year. Late tax penalty  5. Late tax penalty You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). Late tax penalty  6. Late tax penalty Your investment income must be $3,300 or less. Late tax penalty  7. Late tax penalty You must have earned income. Late tax penalty 8. Late tax penalty Your child must meet the relationship, age, residency, and joint return tests. Late tax penalty  9. Late tax penalty Your qualifying child cannot be used by more than one person to claim the EIC. Late tax penalty  10. Late tax penalty You cannot be a qualifying child of another person. Late tax penalty 11. Late tax penalty You must be at least age 25 but under age 65. Late tax penalty  12. Late tax penalty You cannot be the dependent of another person. Late tax penalty  13. Late tax penalty You cannot be a qualifying child of another person. Late tax penalty  14. Late tax penalty You must have lived in the United States more than half of the year. Late tax penalty 15. Late tax penalty 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. Late tax penalty Rule 3. Late tax penalty Your Filing Status Cannot Be Married Filing Separately If you are married, you usually must file a joint return to claim the EIC. Late tax penalty Your filing status cannot be “Married filing separately. Late tax penalty ” Spouse did not live with you. Late tax penalty   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. Late tax penalty In that case, you may be able to claim the EIC. Late tax penalty For detailed information about filing as head of household, see chapter 2 . Late tax penalty Rule 4. Late tax penalty You Must Be a U. Late tax penalty S. Late tax penalty 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. Late tax penalty You can use that filing status only if one spouse is a U. Late tax penalty S. Late tax penalty citizen or resident alien and you choose to treat the nonresident spouse as a U. Late tax penalty S. Late tax penalty resident. Late tax penalty If you make this choice, you and your spouse are taxed on your worldwide income. Late tax penalty 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). Late tax penalty If you need more information on making this choice, get Publication 519, U. Late tax penalty S. Late tax penalty Tax Guide for Aliens. Late tax penalty Rule 5. Late tax penalty 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. Late tax penalty You file these forms to exclude income earned in foreign countries from your gross income, or to deduct or exclude a foreign housing amount. Late tax penalty U. Late tax penalty S. Late tax penalty possessions are not foreign countries. Late tax penalty See Publication 54, Tax Guide for U. Late tax penalty S. Late tax penalty Citizens and Resident Aliens Abroad, for more detailed information. Late tax penalty Rule 6. Late tax penalty 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. Late tax penalty If your investment income is more than $3,300, you cannot claim the credit. Late tax penalty For most people, investment income is the total of the following amounts. Late tax penalty Taxable interest (line 8a of Form 1040 or 1040A). Late tax penalty Tax-exempt interest (line 8b of Form 1040 or 1040A). Late tax penalty Dividend income (line 9a of Form 1040 or 1040A). Late tax penalty Capital gain net income (line 13 of Form 1040, if more than zero, or line 10 of Form 1040A). Late tax penalty If you file Form 1040EZ, your investment income is the total of the amount of line 2 and the amount of any tax-exempt interest you wrote to the right of the words “Form 1040EZ” on line 2. Late tax penalty However, see Rule 6 in chapter 1 of Publication 596 if: You are filing Schedule E (Form 1040), Form 4797, or Form 8814, or You are reporting income from the rental of personal property on Form 1040, line 21. Late tax penalty Rule 7. Late tax penalty You Must Have Earned Income This credit is called the “earned income” credit because, to qualify, you must work and have earned income. Late tax penalty If you are married and file a joint return, you meet this rule if at least one spouse works and has earned income. Late tax penalty If you are an employee, earned income includes all the taxable income you get from your employer. Late tax penalty If you are self-employed or a statutory employee, you will figure your earned income on EIC Worksheet B in the instructions for Form 1040. Late tax penalty Earned Income Earned income includes all of the following types of income. Late tax penalty Wages, salaries, tips, and other taxable employee pay. Late tax penalty Employee pay is earned income only if it is taxable. Late tax penalty Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Late tax penalty But there is an exception for nontaxable combat pay, which you can choose to include in earned income, as explained below. Late tax penalty Net earnings from self-employment. Late tax penalty Gross income received as a statutory employee. Late tax penalty Wages, salaries, and tips. Late tax penalty   Wages, salaries, and tips you receive for working are reported to you on Form W-2, in box 1. Late tax penalty You should report these on line 1 (Form 1040EZ) or line 7 (Forms 1040A and 1040). Late tax penalty Nontaxable combat pay election. Late tax penalty   You can elect to include your nontaxable combat pay in earned income for the earned income credit. Late tax penalty Electing to include nontaxable combat pay in earned income may increase or decrease your EIC. Late tax penalty Figure the credit with and without your nontaxable combat pay before making the election. Late tax penalty   If you make the election, you must include in earned income all nontaxable combat pay you received. Late tax penalty If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. Late tax penalty In other words, if one of you makes the election, the other one can also make it but does not have to. Late tax penalty   The amount of your nontaxable combat pay should be shown in box 12 of your Form W-2 with code “Q. Late tax penalty ” Self-employed persons and statutory employees. Late tax penalty   If you are self-employed or received income as a statutory employee, you must use the Form 1040 instructions to see if you qualify to get the EIC. Late tax penalty 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. Late tax penalty Each approved form exempts certain income from social security taxes. Late tax penalty Each form is discussed here in terms of what is or is not earned income for the EIC. Late tax penalty Form 4361. Late tax penalty   Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. Late tax penalty This includes wages, salaries, tips, and other taxable employee compensation. Late tax penalty A nontaxable housing allowance or the nontaxable rental value of a home is not earned income. Late tax penalty Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Late tax penalty Examples include fees for performing marriages and honoraria for delivering speeches. Late tax penalty Form 4029. Late tax penalty   Whether or not you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation count as earned income. Late tax penalty However, amounts you received as a self-employed individual do not count as earned income. Late tax penalty Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040. Late tax penalty 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. Late tax penalty Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. Late tax penalty You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age. Late tax penalty Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Late tax penalty Report taxable pension payments on Form 1040, lines 16a and 16b (or Form 1040A, lines 12a and 12b). Late tax penalty Disability insurance payments. Late tax penalty   Payments you received from a disability insurance policy that you paid the premiums for are not earned income. Late tax penalty It does not matter whether you have reached minimum retirement age. Late tax penalty If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code “J. Late tax penalty ” 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. Late tax penalty Do not include any of these items in your earned income. Late tax penalty Earnings while an inmate. Late tax penalty   Amounts received for work performed while an inmate in a penal institution are not earned income when figuring the earned income credit. Late tax penalty This includes amounts for work performed while in a work release program or while in a halfway house. Late tax penalty Workfare payments. Late tax penalty   Nontaxable workfare payments are not earned income for the EIC. Late tax penalty 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 private sector employment is not available, or (2) community service program activities. Late tax penalty Community property. Late tax penalty   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. Late tax penalty That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. Late tax penalty 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. Late tax penalty Nevada, Washington, and California domestic partners. Late tax penalty   If you are a registered domestic partner in Nevada, Washington, or California, the same rules apply. Late tax penalty Your earned income for the EIC does not include any amount earned by your partner. Late tax penalty Your earned income includes the entire amount you earned. Late tax penalty For details, see Publication 555. Late tax penalty Conservation Reserve Program (CRP) payments. Late tax penalty   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. Late tax penalty Nontaxable military pay. Late tax penalty   Nontaxable pay for members of the Armed Forces is not considered earned income for the EIC. Late tax penalty Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). Late tax penalty See Publication 3, Armed Forces' Tax Guide, for more information. Late tax penalty    Combat pay. Late tax penalty You can elect to include your nontaxable combat pay in earned income for the EIC. Late tax penalty See Nontaxable combat pay election, earlier. Late tax penalty Part B. Late tax penalty Rules If You Have a Qualifying Child If you have met all of the rules in Part A , read Part B to see if you have a qualifying child. Late tax penalty Part B discusses Rules 8 through 10. Late tax penalty You must meet all three of these rules, in addition to the rules in Parts A and D , to qualify for the earned income credit with a qualifying child. Late tax penalty You must file Form 1040 or Form 1040A to claim the EIC with a qualifying child. Late tax penalty (You cannot file Form 1040EZ. Late tax penalty ) You also must complete Schedule EIC and attach it to your return. Late tax penalty If you meet all the rules in Part A and this part, read Part D to find out what to do next. Late tax penalty If you do not meet Rule 8, you do not have a qualifying child. Late tax penalty Read Part C to find out if you can get the earned income credit without a qualifying child. Late tax penalty Rule 8. Late tax penalty Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Your child is a qualifying child if your child meets four tests. Late tax penalty The four tests are: Relationship, Age, Residency, and Joint return. Late tax penalty The four tests are illustrated in Figure 36–1. Late tax penalty The paragraphs that follow contain more information about each test. Late tax penalty 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). Late tax penalty The following definitions clarify the relationship test. Late tax penalty Adopted child. Late tax penalty   An adopted child is always treated as your own child. Late tax penalty The term “adopted child” includes a child who was lawfully placed with you for legal adoption. Late tax penalty Foster child. Late tax penalty   For the EIC, a person is your foster child if the child is placed with you by an authorized placement agency or by judgement, decree, or other order of any court of competent jurisdiction. Late tax penalty An authorized placement agency includes a state or local government agency. Late tax penalty It also includes a tax-exempt organization licensed by a state. Late tax penalty In addition, it includes an Indian tribal government or an organization authorized by an Indian tribal government to place Indian children. Late tax penalty Example. Late tax penalty 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. Late tax penalty Debbie is your foster child. Late tax penalty 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. Late tax penalty    The following examples and definitions clarify the age test. Late tax penalty Example 1—child not under age 19. Late tax penalty Your son turned 19 on December 10. Late tax penalty 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. Late tax penalty Example 2—child not younger than you or your spouse. Late tax penalty Your 23-year-old brother, who is a full-time student and unmarried, lives with you and your spouse. Late tax penalty He is not disabled. Late tax penalty Both you and your spouse are 21 years old and you file a joint return. Late tax penalty Your brother is not your qualifying child because he is not younger than you or your spouse. Late tax penalty Example 3—child younger than your spouse but not younger than you. Late tax penalty The facts are the same as in Example 2 except that your spouse is 25 years old. Late tax penalty Because your brother is younger than your spouse, he is your qualifying child even though he is not younger than you. Late tax penalty Student defined. Late tax penalty   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. Late tax penalty The 5 calendar months need not be consecutive. Late tax penalty   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. Late tax penalty School defined. Late tax penalty   A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. Late tax penalty However, on-the-job training courses, correspondence schools, and schools offering courses only through the Internet do not count as schools for the EIC. Late tax penalty Vocational high school students. Late tax penalty   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. Late tax penalty Permanently and totally disabled. Late tax penalty   Your child is permanently and totally disabled if both of the following apply. Late tax penalty He or she cannot engage in any substantial gainful activity because of a physical or mental condition. Late tax penalty A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death. Late tax penalty Residency Test Your child must have lived with you in the United States for more than half of 2013. Late tax penalty The following definitions clarify the residency test. Late tax penalty United States. Late tax penalty   This means the 50 states and the District of Columbia. Late tax penalty It does not include Puerto Rico or U. Late tax penalty S. Late tax penalty possessions such as Guam. Late tax penalty Homeless shelter. Late tax penalty   Your home can be any location where you regularly live. Late tax penalty You do not need a traditional home. Late tax penalty 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. Late tax penalty Military personnel stationed outside the United States. Late tax penalty    U. Late tax penalty S. Late tax penalty 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. Late tax penalty Figure 36-1. Late tax penalty Tests for Qualifying Child Please click here for the text description of the image. Late tax penalty Qualifying child Extended active duty. Late tax penalty   Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Late tax penalty 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. Late tax penalty Birth or death of a child. Late tax penalty   A 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. Late tax penalty Temporary absences. Late tax penalty   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. Late tax penalty Examples of a special circumstance include illness, school attendance, business, vacation, military service, and detention in a juvenile facility. Late tax penalty Kidnapped child. Late tax penalty    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. Late tax penalty The child must be presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or your child's family. Late tax penalty This treatment applies for all years until the child is returned. Late tax penalty 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. Late tax penalty   If your qualifying child has been kidnapped and meets these requirements, enter “KC,” instead of a number, on line 6 of Schedule EIC. Late tax penalty Joint Return Test To meet this test, the child cannot file a joint return for the year. Late tax penalty Exception. Late tax penalty   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. Late tax penalty Example 1—child files joint return. Late tax penalty You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. Late tax penalty He earned $25,000 for the year. Late tax penalty The couple files a joint return. Late tax penalty Because your daughter and her husband filed a joint return, she is not your qualifying child. Late tax penalty Example 2—child files joint return only to claim a refund of withheld tax. Late tax penalty Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. Late tax penalty They do not have a child. Late tax penalty Neither is required to file a tax return. Late tax penalty Taxes were taken out of their pay, so they filed a joint return only to get a refund of the withheld taxes. Late tax penalty The exception to the joint return test applies, so your son may be your qualifying child if all the other tests are met. Late tax penalty Example 3—child files joint return to claim American opportunity credit. Late tax penalty The facts are the same as in Example 2 except no taxes were taken out of your son's pay. Late tax penalty 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. Late tax penalty Because claiming the American opportunity credit is their reason for filing the return, they are not filing it only to get a refund of income tax withheld or estimated tax paid. Late tax penalty The exception to the joint return test does not apply, so your son is not your qualifying child. Late tax penalty Married child. Late tax penalty   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. Late tax penalty Social security number. Late tax penalty   The 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. Late tax penalty 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), which is issued to adopting parents who cannot get an SSN for the child being adopted until the adoption is final. Late tax penalty   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. Late tax penalty For more information about SSNs, see Rule 2 . Late tax penalty Rule 9. Late tax penalty 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. Late tax penalty However, only one of these persons can actually treat the child as a qualifying child. Late tax penalty 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). Late tax penalty The exemption for the child. Late tax penalty The child tax credit. Late tax penalty Head of household filing status. Late tax penalty The credit for child and dependent care expenses. Late tax penalty The exclusion for dependent care benefits. Late tax penalty The EIC. Late tax penalty The other person cannot take any of these benefits based on this qualifying child. Late tax penalty In other words, you and the other person cannot agree to divide these tax benefits between you. Late tax penalty The other person cannot take any of these tax benefits unless he or she has a different qualifying child. Late tax penalty The tiebreaker rules explained next explain who, if anyone, can claim the EIC when more than one person has the same qualifying child. Late tax penalty However, the tiebreaker rules do not apply if the other person is your spouse and you file a joint return. Late tax penalty Tiebreaker rules. Late tax penalty   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. Late tax penalty If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent. Late tax penalty 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. Late tax penalty 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. Late tax penalty 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. Late tax penalty 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. Late tax penalty 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. Late tax penalty 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. Late tax penalty See Example 8 . Late tax penalty   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. Late tax penalty See Examples 1 through 13 . Late tax penalty   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 Part C for people who do not have a qualifying child. Late tax penalty If the other person cannot claim the EIC. Late tax penalty   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. Late tax penalty See Examples 6 and 7 . Late tax penalty 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. Late tax penalty Examples. Late tax penalty The following examples may help you in determining whether you can claim the EIC when you and someone else have the same qualifying child. Late tax penalty Example 1. Late tax penalty You and your 2-year-old son Jimmy lived with your mother all year. Late tax penalty You are 25 years old, unmarried, and your AGI is $9,000. Late tax penalty Your only income was $9,000 from a part-time job. Late tax penalty Your mother's only income was $20,000 from her job, and her AGI is $20,000. Late tax penalty Jimmy's father did not live with you or Jimmy. Late tax penalty The special rule explained later for divorced or separated parents (or parents who live apart) does not apply. Late tax penalty 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. Late tax penalty However, only one of you can treat him as a qualifying child to claim the EIC (and the other tax benefits listed earlier for which that person qualifies). Late tax penalty He is not a qualifying child of anyone else, including his father. Late tax penalty 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). Late tax penalty Example 2. Late tax penalty The facts are the same as in Example 1 except your AGI is $25,000. Late tax penalty Because your mother's AGI is not higher than yours, she cannot claim Jimmy as a qualifying child. Late tax penalty Only you can claim him. Late tax penalty Example 3. Late tax penalty The facts are the same as in Example 1 except that you and your mother both claim Jimmy as a qualifying child. Late tax penalty 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. Late tax penalty 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. Late tax penalty Example 4. Late tax penalty 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. Late tax penalty Only one of you can claim each child. Late tax penalty However, if your mother's AGI is higher than yours, you can allow your mother to claim one or more of the children. Late tax penalty For example, if you claim one child, your mother can claim the other two. Late tax penalty Example 5. Late tax penalty The facts are the same as in Example 1 except that you are only 18 years old. Late tax penalty This means you are a qualifying child of your mother. Late tax penalty Because of Rule 10 , discussed next, you cannot claim the EIC and cannot claim Jimmy as a qualifying child. Late tax penalty Only your mother may be able to treat Jimmy as a qualifying child to claim the EIC. Late tax penalty 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. Late tax penalty Example 6. Late tax penalty The facts are the same as in Example 1 except that your mother earned $50,000 from her job. Late tax penalty Because your mother's earned income is too high for her to claim the EIC, only you can claim the EIC using your son. Late tax penalty Example 7. Late tax penalty The facts are the same as in Example 1 except that you earned $50,000 from your job and your AGI is $50,500. Late tax penalty Your earned income is too high for you to claim the EIC. Late tax penalty But your mother cannot claim the EIC either, because her AGI is not higher than yours. Late tax penalty Example 8. Late tax penalty 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 an AGI of $30,000 on a joint return. Late tax penalty 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. Late tax penalty 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. Late tax penalty In other words, each parent's AGI can be treated as $15,000. Late tax penalty Example 9. Late tax penalty You, your husband, and your 10-year-old son Joey lived together until August 1, 2013, when your husband moved out of the household. Late tax penalty In August and September, Joey lived with you. Late tax penalty For the rest of the year, Joey lived with your husband, who is Joey's father. Late tax penalty 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. Late tax penalty 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. Late tax penalty You and your husband will file separate returns. Late tax penalty Your husband agrees to let you treat Joey as a qualifying child. Late tax penalty 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. Late tax penalty However, your filing status is married filing separately, so you cannot claim the EIC or the credit for child and dependent care expenses. Late tax penalty See Rule 3 . Late tax penalty Example 10. Late tax penalty The facts are the same as in Example 9 except that you and your husband both claim Joey as a qualifying child. Late tax penalty In this case, only your husband will be allowed to treat Joey as a qualifying child. Late tax penalty This is because, during 2013, the boy lived with him longer than with you. Late tax penalty You cannot claim the EIC (either with or without a qualifying child). Late tax penalty 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. Late tax penalty See Rule 3 . Late tax penalty Example 11. Late tax penalty You, your 5-year-old son and your son's father lived together all year. Late tax penalty You and your son's father are not married. Late tax penalty 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. Late tax penalty Your earned income and AGI are $12,000, and your son's father's earned income and AGI are $14,000. Late tax penalty Neither of you had any other income. Late tax penalty Your son's father agrees to let you treat the child as a qualifying child. Late tax penalty 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. Late tax penalty Example 12. Late tax penalty 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. Late tax penalty In this case, only your son's father will be allowed to treat your son as a qualifying child. Late tax penalty This is because his AGI, $14,000, is more than your AGI, $12,000. Late tax penalty You cannot claim the EIC (either with or without a qualifying child). Late tax penalty Example 13. Late tax penalty You and your 7-year-old niece, your sister's child, lived with your mother all year. Late tax penalty You are 25 years old, and your AGI is $9,300. Late tax penalty Your only income was from a part-time job. Late tax penalty Your mother's AGI is $15,000. Late tax penalty Her only income was from her job. Late tax penalty Your niece's parents file jointly, have an AGI of less than $9,000, and do not live with you or their child. Late tax penalty 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. Late tax penalty However, only your mother can treat her as a qualifying child. Late tax penalty This is because your mother's AGI, $15,000, is more than your AGI, $9,300. Late tax penalty Special rule for divorced or separated parents (or parents who live apart). Late tax penalty   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. Late tax penalty 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 times during the last 6 months of 2013, whether or not they are or were married. Late tax penalty The child received over half of his or her support for the year from the parents. Late tax penalty The child is in the custody of one or both parents for more than half of 2013. Late tax penalty Either of the following statements is true. Late tax penalty 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. Late tax penalty 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. Late tax penalty 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. Late tax penalty  For details, see chapter 3. Late tax penalty Also see Applying Rule 9 to divorced or separated parents (or parents who live apart) , next. Late tax penalty Applying Rule 9 to divorced or separated parents (or parents who live apart). Late tax penalty   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. Late tax penalty 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. Late tax penalty 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. Late tax penalty Example 1. Late tax penalty You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Late tax penalty Your AGI is $10,000. Late tax penalty Your mother’s AGI is $25,000. Late tax penalty Your son's father did not live with you or your son. Late tax penalty Under the special rule for children of 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. Late tax penalty 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. Late tax penalty You and your mother did not have any child care expenses or dependent care benefits. Late tax penalty 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. Late tax penalty Example 2. Late tax penalty The facts are the same as in Example 1 except that your AGI is $25,000 and your mother's AGI is $21,000. Late tax penalty Your mother cannot claim your son as a qualifying child for any purpose because her AGI is not higher than yours. Late tax penalty Example 3. Late tax penalty 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. Late tax penalty Your mother also claims him as a qualifying child for head of household filing status. Late tax penalty You as the child's parent will be the only one allowed to claim your son as a qualifying child for the EIC. Late tax penalty The IRS will disallow your mother's claim to the EIC and head of household filing status unless she has another qualifying child. Late tax penalty Rule 10. Late tax penalty You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. Late tax penalty ) if all of the following statements are true. Late tax penalty You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. Late tax penalty Or, you are that person's brother, sister, half brother, half sister, stepbrother, or stepsister (or a descendant of any of them). Late tax penalty 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. Late tax penalty You lived with that person in the United States for more than half of the year. Late tax penalty 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). Late tax penalty For more details about the tests to be a qualifying child, see Rule 8 . Late tax penalty If you are a qualifying child of another taxpayer, you cannot claim the EIC. Late tax penalty 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. Late tax penalty Put “No” beside line 64a (Form 1040) or line 38a (Form 1040A). Late tax penalty Example. Late tax penalty You and your daughter lived with your mother all year. Late tax penalty You are 22 years old, unmarried, and attended a trade school full time. Late tax penalty You had a part-time job and earned $5,700. Late tax penalty You had no other income. Late tax penalty Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother. Late tax penalty She can claim the EIC if she meets all the other requirements. Late tax penalty Because you are your mother's qualifying child, you cannot claim the EIC. Late tax penalty This is so even if your mother cannot or does not claim the EIC. Late tax penalty Child of person not required to file a return. Late tax penalty   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. Late tax penalty Example. Late tax penalty 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. Late tax penalty As a result, you are not your mother's qualifying child. Late tax penalty You can claim the EIC if you meet all the other requirements to do so. Late tax penalty   See Rule 10 in Publication 596 for additional examples. Late tax penalty Part C. Late tax penalty Rules If You Do Not Have a Qualifying Child Read this part if you: Do not have a qualifying child, and Have met all the rules in Part A . Late tax penalty  Part C discusses Rules 11 through 14. Late tax penalty You must meet all four of these rules, in addition to the rules in Parts A and D , to qualify for the earned income credit without a qualifying child. Late tax penalty If you have a qualifying child, the rules in this part do not apply to you. Late tax penalty You can claim the credit only if you meet all the rules in Parts A, B, and D. Late tax penalty See Rule 8 to find out if you have a qualifying child. Late tax penalty Rule 11. Late tax penalty 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. Late tax penalty 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. Late tax penalty It does not matter which spouse meets the age test, as long as one of the spouses does. Late tax penalty You meet the age test if you were born after December 31, 1948, and before January 2, 1989. Late tax penalty 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. Late tax penalty If neither you nor your spouse meets the age test, you cannot claim the EIC. Late tax penalty Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Late tax penalty Death of spouse. Late tax penalty   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. Late tax penalty Example 1. Late tax penalty You are age 28 and unmarried. Late tax penalty You meet the age test. Late tax penalty Example 2—spouse meets age test. Late tax penalty You are married and filing a joint return. Late tax penalty You are age 23 and your spouse is age 27. Late tax penalty You meet the age test because your spouse is at least age 25 but under age 65. Late tax penalty Example 3—spouse dies in 2013. Late tax penalty You are married and filing a joint return with your spouse who died in August 2013. Late tax penalty You are age 67. Late tax penalty Your spouse would have become age 65 in November 2013. Late tax penalty Because your spouse was under age 65 when she died, you meet the age test. Late tax penalty Rule 12. Late tax penalty 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. Late tax penalty 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. Late tax penalty If you are not sure whether someone else can claim you (or your spouse, if filing a joint return) as a dependent, read the rules for claiming a dependent in chapter 3. Late tax penalty If someone else can claim you (or your spouse, if filing a joint return) as a dependent on his or her return, but does not, you still cannot claim the credit. Late tax penalty Example 1. Late tax penalty In 2013, you were age 25, single, and living at home with your parents. Late tax penalty You worked and were not a student. Late tax penalty You earned $7,500. Late tax penalty Your parents cannot claim you as a dependent. Late tax penalty 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. Late tax penalty You meet this rule. Late tax penalty You can claim the EIC if you meet all the other requirements. Late tax penalty Example 2. Late tax penalty The facts are the same as in Example 1 , except that you earned $2,000. Late tax penalty Your parents can claim you as a dependent but decide not to. Late tax penalty You do not meet this rule. Late tax penalty You cannot claim the credit because your parents could have claimed you as a dependent. Late tax penalty Joint returns. Late tax penalty   You generally cannot be claimed as a dependent by another person if you are married and file a joint return. Late tax penalty   However, another person may be able to claim you as a dependent if you and your spouse file a joint return only to get a refund of income tax withheld or estimated tax paid. Late tax penalty But neither you nor your spouse can be claimed as a dependent by another person if you claim the EIC on your joint return. Late tax penalty Example 1. Late tax penalty You are 26 years old. Late tax penalty You and your wife live with your parents and had $800 of wages from part-time jobs and no other income. Late tax penalty Neither you nor your wife is required to file a tax return. Late tax penalty You do not have a child. Late tax penalty Taxes were taken out of your pay, so you file a joint return only to get a refund of the withheld taxes. Late tax penalty Your parents are not disqualified from claiming an exemption for you just because you filed a joint return. Late tax penalty They can claim exemptions for you and your wife if all the other tests to do so are met. Late tax penalty Example 2. Late tax penalty The facts are the same as in Example 1 except no taxes were taken out of your pay. Late tax penalty 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. Late tax penalty Because claiming the EIC is your reason for filing the return, you are not filing it only to get a refund of income tax withheld or estimated tax paid. Late tax penalty Your parents cannot claim an exemption for either you or your wife. Late tax penalty Rule 13. Late tax penalty You Cannot Be a Qualifying Child of Another Taxpayer You are a qualifying child of another taxpayer (your parent, guardian, foster parent, etc. Late tax penalty ) if all of the following statements are true. Late tax penalty You are that person's son, daughter, stepchild, foster child, or a descendant of any of them. Late tax penalty Or, you are that person's brother, sister, half brother, half sister, stepbrother, or stepsister (or a descendant of any of them). Late tax penalty 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 (as defined in Rule 8 ), and younger than that person (or that person's spouse, if the person files jointly), or Permanently and totally disabled, regardless of age. Late tax penalty You lived with that person in the United States for more than half of the year. Late tax penalty 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). Late tax penalty For more details about the tests to be a qualifying child, see Rule 8 . Late tax penalty If you are a qualifying child of another taxpayer, you cannot claim the EIC. Late tax penalty 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. Late tax penalty Put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Late tax penalty Example. Late tax penalty You lived with your mother all year. Late tax penalty You are age 26, unmarried, and permanently and totally disabled. Late tax penalty Your only income was from a community center where you went three days a week to answer telephones. Late tax penalty You earned $5,000 for the year and provided more than half of your own support. Late tax penalty Because you meet the relationship, age, residency, and joint return tests, you are a qualifying child of your mother for the EIC. Late tax penalty She can claim the EIC if she meets all the other requirements. Late tax penalty Because you are a qualifying child of your mother, you cannot claim the EIC. Late tax penalty This is so even if your mother cannot or does not claim the EIC. Late tax penalty Joint returns. Late tax penalty   You generally cannot be a qualifying child of another taxpayer if you are married and file a joint return. Late tax penalty   However, you may be a qualifying child of another taxpayer if you and your spouse file a joint return for the year only to get a refund of income tax withheld or estimated tax paid. Late tax penalty But neither you nor your spouse can be a qualifying child of another taxpayer if you claim the EIC on your joint return. Late tax penalty Child of person not required to file a return. Late tax penalty   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. Late tax penalty Example. Late tax penalty You lived all year with your father. Late tax penalty You are 27 years old, unmarried, permanently and totally disabled, and earned $13,000. Late tax penalty You have no other income, no children, and provided more than half of your own support. Late tax penalty Your father had no gross income, is not required to file a 2013 tax return, and does not file a 2013 tax return. Late tax penalty As a result, you are not your father's qualifying child. Late tax penalty You can claim the EIC if you meet all the other requirements to do so. Late tax penalty   See Rule 13 in Publication 596 for additional examples. Late tax penalty Rule 14. Late tax penalty 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. Late tax penalty If it was not, put “No” next to line 64a (Form 1040), line 38a (Form 1040A), or line 8a (Form 1040EZ). Late tax penalty United States. Late tax penalty   This means the 50 states and the District of Columbia. Late tax penalty It does not include Puerto Rico or U. Late tax penalty S. Late tax penalty possessions such as Guam. Late tax penalty Homeless shelter. Late tax penalty   Your home can be any location where you regularly live. Late tax penalty You do not need a traditional home. Late tax penalty If you lived in one or more homeless shelters in the United States for more than half the year, you meet this rule. Late tax penalty Military personnel stationed outside the United States. Late tax penalty   U. Late tax penalty S. Late tax penalty military personnel stationed outside the United States on extended active duty (defined in Rule 8 ) are considered to live in the United States during that duty period for purposes of the EIC. Late tax penalty Part D. Late tax penalty Figuring and Claiming the EIC Read this part if you have met all the rules in Parts A and B, or all the rules in Parts A and C. Late tax penalty Part D discusses Rule 15 . Late tax penalty You must meet this rule, in addition to the rules in Parts A and B , or Parts A and C , to qualify for the earned income credit. Late tax penalty This part of the chapter also explains how to figure the amount of your credit. Late tax penalty You have two choices. Late tax penalty Have the IRS figure the EIC for you. Late tax penalty If you want to do this, see IRS Will Figure the EIC for You . Late tax penalty Figure the EIC yourself. Late tax penalty If you want to do this, see How To Figure the EIC Yourself . Late tax penalty Rule 15. Late tax penalty 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. Late tax penalty Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Late tax penalty Employee pay is earned income only if it is taxable. Late tax penalty Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Late tax penalty But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Late tax penalty Earned income is explained in detail in Rule 7 . Late tax penalty Figuring earned income. Late tax penalty   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. Late tax penalty   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. Late tax penalty   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). Late tax penalty You will then reduce that amount by any amount included on that line and described in the following list: Scholarship or fellowship grants not reported on a Form W-2, Inmate's income, and Pension or annuity from deferred compensation plans. Late tax penalty Scholarship or fellowship grants not reported on a Form W-2. Late tax penalty   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. Late tax penalty Inmate's income. Late tax penalty   Amounts received for work performed while an inmate in a penal institution are not earned income for the earned income credit. Late tax penalty This includes amounts received for work performed while in a work release program or while in a halfway house. Late tax penalty 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). Late tax penalty Pension or annuity from deferred compensation plans. Late tax penalty   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. Late tax penalty 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). Late tax penalty This amount may be reported in box 11 of your Form W-2. Late tax penalty If you received such an amount but box 11 is blank, contact your employer for the amount received as a pension or annuity. Late tax penalty Clergy. Late tax penalty   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 reported on line 7 (Form 1040), subtract that amount from the amount on line 7 (Form 1040) and enter the result in the first space of the worksheet in Step 5 of the Form 1040 instructions for lines 64a and 64b. Late tax penalty Put “Clergy” on the dotted line next to line 64a (Form 1040). Late tax penalty Church employees. Late tax penalty    A church employee means an employee (other than a minister or member of a religious order) of a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes. Late tax penalty If you received wages as a