The earned income credit (EIC) is designed to encourage low-income individuals to become gainfully employed. It is a refundable credit—one that the taxpayer may receive even when no tax is due. In essence, it’s a negative income tax. In many situations, more than one member of the same family may qualify for the EIC. The question is, Who is entitled to take it?
IRS Service Center Advice 1998-048 explains how an EIC tiebreaker works in some family situations.
A grandmother, her daughter (mother) and her granddaughter live together for the entire tax year. The mother meets the EIC age requirement so she is a qualifying child of the grandmother. (A qualifying child for the EIC must be under 19, under 24 if a full-time student, or permanently and totally disabled.)
If the granddaughter is a qualifying child of both her grandmother and mother, IRC section 32(c)(1)(C)—the tiebreaker rule—should apply, but it doesn’t. Instead, IRC section 32(c)(1)(B) applies. It says if an individual, such as the mother, is a qualifying child of another taxpayer (the grandmother, in this example), then she is not treated as an eligible individual for EIC purposes. Therefore, the grandmother is the one who can claim the credit for both her daughter and her granddaughter.
If the mother is too old to satisfy the age requirement, she is not a qualifying child of the grandmother. Thus, the tiebreaker rule would apply. It states that when two or more eligible individuals qualify with respect to the same child, only the individual with the highest modified adjusted gross income can claim the credit.
In recently released Legal Memorandum 1999-34017, the IRS explained how the tiebreaker rule applies if both grandparents are alive.
Assume the mother is 25 years old with a modified AGI of $9,000. The grandparents have a combined modified AGI of $12,000 ($8,000 for the grandfather and $4,000 for the grandmother).
If the grandparents file a joint return, they get the credit under the tiebreaker rule because their combined modified AGI ($12,000) is higher than the mother’s ($9,000). However, if the grandparents file separate returns, the mother could claim the credit because she has the highest separate modified AGI. Even if one of the grandparents had a higher separate modified AGI than the mother’s, that grandparent could not claim the credit because IRS section 32(d) requires married individuals to file a joint return in order to claim it.
Observation. The tiebreaker rule operates to award the credit to the individual with the highest income. Since the EIC phases out when a taxpayer’s income reaches a certain level, not everyone can claim the credit.
In addition, separate residencies can bar some families from taking advantage of the EIC. For instance, if the mother and the granddaughter in the examples above lived on their own for more than six months of the tax year, then the residency rule of IRC section 32(a)(3)(B)(iii) would prevent the grandparents from claiming the credit.
—, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island.