Example 2. David and Judy Brown David and Judy Brown have three children--Karl, age 4, andtwins, Karin and Susan, age 2. David worked and earned $17,200. Heasked his employer to contribute $1,200 of his pay to a 401(k) plan,so he will pay tax on only $16,000 ($17,200 - $1,200). Hereceived $1,500 in unemployment compensation. David also began aconsulting business. After expenses, David had a loss of $1,000. Judymade crafts and sold them at a flea market. She had a profit of $706.In addition, David and Judy received $50 in interest from a savingsaccount. Judy completes Schedule C-EZ and reports the $706 profit. Shealso completes Schedule SE and calculated self-employment tax of $100.She puts this figure on line 50 (Form 1040) and deducts $50, one-halfof her self-employment tax, on line 27 (Form 1040). David completes Schedule C and reports his $1,000 loss. David andJudy combine their Schedules C and C-EZ to report a loss of $294($706 - $1,000) on line 12 of their Form 1040. David will notcomplete Schedule SE because he does not have any net earnings fromself-employment. David and Judy follow the steps in their Form 1040 instructions toclaim the EIC. The only investment income they have is the $50interest from their savings account. They find out in Step 3 of theForm 1040 instructions that, because they are claiming a loss on line12 of Form 1040, they must use Publication 596to determine if theyare eligible to claim the EIC. When they receive Publication 596,theyread Table 2, What if I was sent here from the instructions forForm 1040 or Form 1040A? hotel rooms Salzburgon page 2 and find that they can startwith Rule 6 on page 7. In Rule 7, they determinethat all three children are qualifying children. In chapter 4,theBrowns figure their nontaxable earned income to be $1,200 (David'scontribution to a 401(k) plan) and their taxable earned income to be$16,000. They complete Worksheet 3 (shown here) and figuretheir modified AGI to be $17,427. Worksheet 3: Modified AGI for Form 1040 Completing EIC Worksheet B.Because the Browns have self-employment income and want to figuretheir credit themselves, they complete EIC Worksheet B(shown here). Part 1.David and Judy begin EIC Worksheet B with Part 1 becauseJudy is self-employed and will file Schedule SE. They enter $706 and$50 from Judy's Schedule SE on lines 1a and 1d respectively. Theyfigure line 1e to be $656 ($706 - $50). Part 2.Because David is not filing Schedule SE, the Browns enter David's$1,000 loss on lines 2b and 2c. They skip Part 3 because neither Davidnor Judy is a statutory employee. Part 4.The Browns combine lines 1e, 2c, and 3 and enter the result on line4a. They enter their nontaxable earned income of $1,200 on line 4b andtheir taxable earned income of $16,000 on line 4c. They figure theirtotal earned income on line 4d to be $16,856. Because that amount isless than $30,580, they qualify for the credit, so they enter theirtotal earned income on line 6. Part 5.David and Judy look up the amount on line 6 ($16,856) in the EICTable for Two children. They enter the amount of $2,886 online 7. They enter their modified AGI amount ($17,427 fromWorksheet 3) on line 8 and see that it is different fromthe amount on line 6. They look up $17,427 in the EIC Table and enterthe amount of $2,770 on line 10. They enter $2,770 on line 11. This isthe smaller of the line 7 amount ($2,886) and the line 10 amount($2,770). Part 6.The Browns do not owe AMT (line 12) so they enter their EIC of$2,770 on line 13. They also enter that amount on line 59a of theirForm 1040. They enter "$1,200" and "401(k) contribution" online 59b to show their nontaxable earned income. They will nowcomplete Schedule EIC (not shown), including information for two oftheir three children, and attach it to their return. They will keepEIC Worksheet B for their records. Browns' EIC Worksheet B, Page 1 Browns' EIC Worksheet B, page 2