Rule 6 - You Must Have Earned Income This credit is called the "earned income credit" because, toqualify, you must work and have earned income. If you are married andfile a joint return, you meet this rule if at least one spouse worksand has earned income. Earned income includes all the income you getfrom working -- even if it is not taxable. You will figure yourearned income in chapter 4by adding your taxable and nontaxableearned income. Worksheet 2 will help you figure theseamounts. Taxable Earned Income Taxable earned income includes: Wages, salaries, and tips, Net earnings from self-employment, and Gross income received as a statutory employee. Wages, salaries, and tips.Wages, salaries, andtips you receive for working are earned income. They are reported toyou on Form W-2, box 1. You should report these on line 1 (Form1040EZ) or line 7 (Forms 1040A and 1040). Tip for household employees.If you were a household employee who did not receive a FormW-2 because your employer paid you less than $1,100 in 1999, besure to include the amount you were paid on line 7 (Form 1040 or1040A) or line 1 (Form 1040EZ). Net earnings from self-employment.You may have net earnings from self-employment if: You own your business, or You are aminister or member of a religious order. Statutory employee.You are astatutory employee if youreceive a Form W-2 on which the "Statutory employee" box(box 15) is checked. You report your income and expenses as astatutory employee on Schedule C or C-EZ (Form 1040). Nontaxable Earned Income This includes anything of value(money, goods, or services) that is not taxable that you received fromyour employer for your work. Common types of nontaxable earned incomeare listed in the following paragraphs. Salary deferrals and reductions. Salary deferrals. These are contributions from your pay tocertain retirement plans (such as a 401(k) plan or the Federal ThriftSavings Plan). These amounts are shown in box 13 of your FormW-2. The "Deferred compensation" box (box 15) of your FormW-2 should be checked. cheap hotel in NaxosSalary reductions, such as under a cafeteria plan unlessthey are included in box 1 of your Form W-2. A cafeteria plan isa benefit plan offered by your employer that allows you to chooseamong two or more benefits consisting of cash and benefits that arenot taxed. If you choose a benefit that is not taxed (such as accidentand health insurance), the amount of the salary reduction isnontaxable earned income when figuring the EIC. Mandatory contributions to a state or local retirement plan. Meals and lodging. Military employee basichousing and subsistence allowances, the value of in-kind housing andsubsistence, and combat zone compensation. These amounts are shown inbox 13 of your Form W-2 with code "Q." See Publication 3,Armed Forces' Tax Guide, for detailed information. Meals and lodging provided for the convenience of youremployer. Housing allowance or rental value of a parsonage for theclergy. But do not include either ofthese items in Worksheet 2 on page 22, unless the item doesnot have to be included on Schedule SE, line 2. Excludable employer-provided benefits. Dependent care benefits(line 18 of Form 2441 or Schedule 2(Form 1040A)). Adoption benefits(Form 8839, line 30). Educational assistance benefits (these may be shown in box14 of your Form W-2). Native Americans If you are aNative American and receivedamounts for services performed as an employee that are exempt fromfederal income tax under the Internal Revenue Code or because of atreaty, agreement, Act of Congress, or other federal law, theseamounts are nontaxable earned income when figuring the EIC. (However,any tax-exempt income you received for performing services as aself-employed individual is not earned income when figuring the EIC.) Approved Form 4361 or Form 4029 This section is for persons who have an approved: Form 4361, Application for Exemption fromSelf-Employment Tax for Use by Ministers, Members of Religious Ordersand Christian Science Practitioners, or Form 4029, Application for Exemption fromSocial Security and Medicare Taxes and Waiver ofBenefits. Each approved form exempts certain income from social securitytaxes. Each form is discussed in this section in terms of what is oris not earned income for purposes of the EIC. Form 4361.Even if you have an approved Form 4361, amounts you received forperforming ministerial duties as an employee count as earned income.This includes wages, salaries, tips, and "other employeecompensation." "Other employee compensation" includesnontaxable compensation such as housing allowances or the rental valueof a parsonage that you receive for services as an employee. Amountsyou received for performing ministerial duties, but not as anemployee, do not count as earned income. Examples include fees forperforming marriages and honoraria for delivering speeches. Form 4029.Even if you have an approved Form 4029, all wages, salaries, tips,and other employee compensation count as earned income. However,amounts you received as a self-employed individual do not count asearned income. Also, in figuring earned income, do not subtract losseson Schedule C, C-EZ, or F from wages on line 7 of Form 1040. Disability Benefits If you retired ondisability, benefits youreceive under your employer's disability retirement plan areconsidered earned income until you reach minimum retirement age.Minimum retirement age generally is the earliest age at which youcould have received a pension or annuity if you were not disabled. Youmust report your taxable disability payments on line 7 of either Form1040 or Form 1040A until you reach minimum retirement age. Beginning on the day after you reach minimum retirement age,payments you receive are taxable as a pension and are not consideredearned income. Report taxable pension payments on Form 1040, lines 16aand 16b, or Form 1040A, lines 11a and 11b. Disability insurance payments.Payments you received from a disability insurance policy that youpaid the premiums for are not earned income. It does not matterwhether you have reached minimum retirement age. If this policy isthrough your employer, the amount may be shown in box 13 of your FormW-2 with code "J." Income That Is Not Earned Income Examplesof items that are NOT earned income include interest anddividends, pensions and annuities, social security and railroadretirement benefits, alimony and child support, welfare benefits,workers' compensation benefits, unemployment compensation (insurance),nontaxable foster care payments, and veterans' benefits, including VArehabilitation payments. Do NOT include any of these itemsin your nontaxable or taxable earned income. Earnings while an inmate.Amounts received for work performedwhile an inmate in a penal institution are not earned income whenfiguring the earned income credit. These amounts include amountsreceived through a work release program or while in a halfway house. Workfare payments.Nontaxable workfare paymentsare not earned income for the EIC. These are cash payments certainpeople receive from a state or local agency that administers publicassistance programs funded under the federal Temporary Assistance forNeedy Families (TANF) program in return for certain work activitiessuch as (1) work experience activities (including remodeling orrepairing public housing) if sufficient private sector employment isnot available, or (2) community service program activities. Community property.If you are married, qualify to file as head of household, and livein a state that has community propertylaws, your earned income forthe EIC does not include any amount earned by your spouse that istreated as belonging to you under those laws. That amount is notearned income for the EIC, even though you must include it in yourgross income on your income tax return. Your earned income includesthe entire amount you earned, even if part of it is treated asbelonging to your spouse under your state's community property laws.