The Earned Income Credit

A special tax credit, known as the earned income credit or EIC, is available to lower-income taxpayers who have at least some earnings from personal services during the year. For 2007, the credit is available to most workers between the ages of 25 and 64 with an adjusted gross income (AGI) of less than $12,590 ($14,590 if married filing jointly) if they have no qualifying children. Workers with one qualifying child may get the credit if their AGI is less than $33,241 ($35,241 if filing jointly), or less than $37,783 ($39,783 if filing jointly) if they have more than one qualifying child.

However, if you have investment income over $2,900 or more in 2007, you won't qualify for the credit. Investment income includes taxable and nontaxable interest and dividends, capital gains, net income from rental of personal property, net royalty income, and net income from passive activities shown on Schedule E, including real estate rentals (see IRS Publication 596, Earned Income Credit, if you are on the borderline and need to know exactly which lines on Schedule E to look at in determining your passive income).

All of these ceiling amounts are adjusted for inflation each year.

Work Smart The extraordinary thing about the EIC is that if your credit is higher than the tax you'd otherwise owe, you will get the difference as a "refund" from the IRS. This extra payment from the federal government is intended to reward lower-income persons for working.

If you think the EIC might apply to you, you need to know:

• whether you are eligible for the credit
• how the credit is computed

Planning Tools You can download Schedule EIC and Schedule E to aid in your financial planning.