GroundSkill
Determine earned income credit eligibility, disallowance, and adoption credit
The earned income credit and the adoption credit both depend heavily on procedure as well as arithmetic. The earned income credit asks who worked, who lived where, and how old everyone is, and then the preparer must document that the questions were asked. The adoption credit asks what was spent, when the adoption became final, and whether the state called the child special needs, and then it splits the answer into a refundable part and a nonrefundable part that are treated differently. This lesson works both credits the way a return does: eligibility first, paperwork second, computation last.
The earned income credit (EIC) rewards work: it goes to people with earnings and can refund even when no tax is owed. Every eligibility test must be met, and failing any one ends the claim.
| Test | Rule |
|---|---|
| Work and status | Earnings from work; no Form 2555 foreign-earned-income filing; no nonresident-alien spouse status without the resident election |
| Investment income | Figured first — Worksheet 1 in Pub. 596 when Schedule E, Form 4797, or passive-activity amounts are present — then tested against $11,950; more than $11,950 ends the claim |
| Income | Line 11b below the band for the claimant's child count: $50,434 (1 child), $57,310 (2), $61,555 (3+), $19,104 (none); joint thresholds run higher |
| Earned income | Same child-count bands applied separately to earned income at Step 5; both the line-11b and earned-income tests must be met |
| Qualifying child | Relationship list plus under-19 (under-24 student, any age if permanently and totally disabled) age, joint-return, and more-than-half-the-year U.S.-residence tests |
| No qualifying child | Age 25 to 64 at year-end, U.S. main home over half the year, not anyone's qualifying child or dependent; a married taxpayer filing separately or as head of household is barred on this path |
Earned income faces the same child-count bands as line-11b AGI, so a claim must clear both tests. Everyone on the claim also needs the right number: you (and a joint spouse) need an SSN issued on or before the due date, including extensions, that allows work and is valid for EIC purposes, and only children with valid SSNs increase the credit.
The relationship list reaches beyond sons and daughters to siblings and every descendant of any listed relative, so nephews, nieces, and grandchildren all fit. The residence test is strict: the return must show the child lived with the claimant, and records such as school and child-care addresses back it up. A married claimant filing separately may still qualify: the separated-spouse rule preserves the credit with a qualifying child, U.S. residence over half the year, and either six months apart or a written legal separation.
Tess, 32, files single with her 7-year-old daughter, who lived with her in the United States all year; both hold SSNs valid for employment issued before the return due date. Tess earned $24,000 and holds AGI of $24,000, clearing both the earned-income and line-11b tests below the $50,434 one-child line, with $100 of investment income. She passes every test: work with no Form 2555, investment income within bounds, both income tests met, timely valid SSNs, and a daughter meeting the relationship, age, joint-return, and residence tests. She claims the EIC with one qualifying child and completes Schedule EIC. Had her investment income been $15,000, the investment income test would have ended the claim before the child tests began, because investment income of more than $11,950 bars the credit.
Form 1040 Instructions Page 40
The EIC is a credit for certain people who work. The credit may give you a refund even if you don’t owe any tax or didn’t have any tax withheld.View on the source
Form 1040 Instructions Page 40
Is your investment income more than $11,950?View on the source
Form 1040 Instructions Page 40
• 3 or more children who have valid SSNs lived with you, is the amount on Form 1040 or 1040-SR, line 11b, less than $61,555 ($68,675 if married filing jointly)?View on the source
Form 1040 Instructions Page 40
• 2 children who have valid SSNs lived with you, is the amount on Form 1040 or 1040-SR, line 11b, less than $57,310 ($64,430 if married filing jointly)?View on the source
Form 1040 Instructions Page 40
1 child who has a valid SSN lived with you, is the amount on Form 1040 or 1040-SR, line 11b, less than $50,434 ($57,554 if married filing jointly)?View on the source
Form 1040 Instructions Page 40
• No children who have valid SSNs lived with you, is the amount on Form 1040 or 1040-SR, line 11b, less than $19,104 ($26,214 if married filing jointly)?View on the source
Form 1040 Instructions Page 41
A qualifying child for the EIC is your... Son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew)View on the source
Form 1040 Instructions Page 41
Under age 19 at the end of 2025 and younger than you (or your spouse if filing jointly) or Under age 24 at the end of 2025, a full-time student (defined later), and younger than you (or your spouse if filing jointly). If the child is a full-time student, check the “Full-time student” box on row (6) of the Dependents section on page 1 of Form 1040 or 1040-SR or Any age and permanently and totally disabled (defined later). If the child is permanently and totally disabled, check the “Permanently and totally disabled” box on row (6) of the Dependents section on page 1 of Form 1040 or 1040-SR.View on the source
Form 1040 Instructions Page 41
Who lived with you in the United States for more than half of 2025.View on the source
Form 1040 Instructions Page 41
Were you, or your spouse if filing a joint return, at least age 25 but under age 65 at the end of 2025? (Check “Yes” if you, or your spouse if filing a joint return, were born after December 31, 1960, and before January 2, 2001.)View on the source
Form 1040 Instructions Page 40
Are you filing Form 2555 (relating to foreign earned income)? No. Continue Yes. STOP You can’t take the credit.View on the source
Form 1040 Instructions Page 44
Special rule for separated spouses. If you are married, but not filing a joint return, had a qualifying child who lived with you in the United States for more than half of 2025, and either of the following apply, you can claim the EIC if: • You lived apart from your spouse for the last 6 months of 2025, or • You are legally separated according to your state law under a written separation agreement or a decree of separate maintenance and you didn’t live in the same household as your spouse at the end of 2025.View on the source
Form 1040 Instructions Page 42
3. If you have: • 3 or more qualifying children who have valid SSNs, is your earned income less than $61,555 ($68,675 if married filing jointly)? • 2 qualifying children who have valid SSNs, is your earned income less than $57,310 ($64,430 if married filing jointly)? • 1 qualifying child who has a valid SSN, is your earned income less than $50,434 ($57,554 if married filing jointly)? • No qualifying children who have valid SSNs, is your earned income less than $19,104 ($26,214 if married filing jointly)? Yes. Go to Step 6. No. STOP You can’t take the credit.View on the source
Form 1040 Instructions Page 40
2. Do you, and your spouse if filing a joint return, have a social security number issued on or before the due date of your 2025 return (including extensions)View on the source
Form 1040 Instructions Page 44
For the EIC, a valid SSN is a number issued by the Social Security Administration unless “Not Valid for Employment” is printed on the social security card and the number was issued solely to allow the recipient of the SSN to apply for or receive a federally funded benefit.View on the source
Form 1040 Instructions Page 45
If you didn’t have an SSN issued on or before the due date of your 2025 return (including extensions), you can’t claim the EIC on your original or an amended 2025 return. If a child didn’t have an SSN issued on or before the due date of your return (including extensions), you can’t count that child as a qualifying child in figuring the amount of the EIC on your original or an amended 2025 return.View on the source
Form 8867 Instructions Page 1
EIC rules for taxpayers with a qualifying child. If your client is claiming the EIC with a qualifying child, you should follow the rules that apply to filers with a qualifying child or children when determining whether your client is eligible to claim the EIC even if none of your client’s qualifying children have a valid SSN issued on or before the due date of your client’s return (including extensions). However, in determining the amount of the credit, only qualifying children with valid SSNs make your client eligible for an increased credit amount.View on the source
Form 1040 Instructions Page 40
3. Are you filing Form 4797 (relating to sales of business property)? Yes. See Form 4797 No. STOP filers, later, under You can’t take the credit. Definitions and Special Rules.View on the source
Form 1040 Instructions Page 40
4. Do any of the following apply for 2025? • You are filing Schedule E. • You are reporting income from the rental of personal property not used in a trade or business. • You are filing Form 8814 (relating to election to report child’s interest and dividends on your return). • You have income or loss from a passive activity. Yes. Use Worksheet 1 No. Go to Step 3. in Pub. 596 to see if you can take the credit.View on the source
Form 1040 Instructions Page 43
Form 4797 filers. If the amount on Form 1040 or 1040-SR, line 7a, includes an amount from Form 4797, you must use Worksheet 1 in Pub. 596 to see if you can take the EIC. Otherwise, stop; you can’t take the EIC.View on the source
Form 1040 Instructions Page 41
1. Are you a married taxpayer whose filing status is married filing separately or head of household? No. Continue Yes. STOP You can’t take the credit.View on the source
Form 1040 Instructions Page 42
3. Was your main home, and your spouse’s if filing a joint return, in the United States for more than half of 2025? Your main home can be any location where you regularly live. If your main home (and spouse’s if filing a joint return) was in the United States for more than half of 2025, check the box to the right of the address block on page 1 of Form 1040 or 1040–SR. See Main home and United States, later. Members of the military stationed outside the United States, see Members of the military, later, before you answer. Yes. Continue No. STOP You can’t take the credit. Check the box on line 27c.View on the source
Form 1040 Instructions Page 42
5. Could you be a qualifying child of another person for 2025? (Check “No” if the other person isn’t required to file, and isn’t filing, a 2025 tax return or is filing a 2025 return only to claim a refund of withheld income tax or estimated tax paid (see Pub. 596 for examples).) No. Continue Yes. STOP You can’t take the credit. Check the box on line 27c.View on the source
Form 1040 Instructions Page 42
6. Can you be claimed as a dependent on someone else’s 2025 tax return? (If the person who could claim you on their 2025 tax return is not required to file, and isn’t filing a 2025 tax return or is filing a 2025 return only to claim a refund of withheld income tax or estimated tax paid, check “No.”) No. Go to Step 5. Yes. STOP You can’t take the credit.View on the source
Nadia is 32, single, and lived in the United States all of 2025. She earned $18,000 in wages. Her EIC investment income is $12,400. She has no qualifying child. Which of the following is correct regarding her 2025 earned income credit?
An EIC claim that passes every test must still meet the paperwork requirements. A paid preparer who touches an EIC, CTC/ACTC/ODC, AOTC, or head-of-household claim completes Form 8867, the due-diligence checklist, and meets the regulatory requirements behind it: interview the client, ask adequate questions, gather appropriate and sufficient information, contemporaneously document the inquiries and responses, and keep all five of the following records for 3 years from the latest of the return due date, filing or presentation date, or submission date: a copy of Form 8867; the applicable EIC worksheet; copies of any taxpayer documents relied on; a record of how, when, and from whom the Form 8867 and worksheet information was obtained; and a record of any additional information relied on, including the questions asked and the taxpayer's responses. Each failure can draw its own penalty.
Two post-claim regimes follow. The tie-breakers settle competing claims: a parent beats a nonparent; joint parents share; separated claimants defer to longer residence, then higher AGI; and a nonparent prevails over a silent parent only with higher AGI. Disallowance penalizes improper claims: recklessness bars the credit for the 2 tax years after the tax year of the disallowed claim, and fraud for the 10 tax years after it, whenever the determination itself is made. Once the ban ends, the taxpayer recertifies with Form 8862 on the next EIC claim. Refunds on EIC returns cannot issue before mid-February, and the delay reaches the entire refund.
A preparer meets a new client claiming the EIC with two children. She interviews the client on relationship, residence months, and support; records that the children lived with the client 12 months; keeps the school letters the client provided; and completes Form 8867 with the return. Months later the IRS makes a final determination that this 2025 claim was reckless. The client cannot take the EIC for 2026 or 2027, the 2 tax years after the claim year, even if otherwise eligible, files Form 8862 with the 2028 claim to recertify, and learns that any EIC refund in a qualifying year waits until after the mid-February release.
Form 8867 Instructions Page 1
If you were paid to prepare a return for any taxpayer claiming the EIC, the CTC/ACTC/ODC, the AOTC, and/or HOH filing status, you must complete Form 8867 and meet the other due diligence requirements described later.View on the source
Form 8867 Instructions Page 2
As part of exercising due diligence, you must interview the client, ask adequate questions, and obtain appropriate and sufficient information to determine the correct reporting of income, claiming of tax benefits (such as deductions and credits), and compliance with the tax laws.View on the source
Form 8867 Instructions Page 2
Failure to meet the due diligence requirements could result in a penalty for each failure.View on the source
Form 8867 Instructions Page 5
You must keep those records for 3 years from the latest of the following dates. • The due date of the tax return (not including extensions). • The date the return was filed (if you are a signing tax return preparer electronically filing the return). • The date the return was presented to the taxpayer for signature (if you are a signing tax return preparer not electronically filing the return). • The date you submitted to the signing tax return preparer the part of the return for which you were responsible (if you are a nonsigning tax return preparer).View on the source
Form 8867 Instructions Page 4
If the parents do not file a joint return together but both parents claim the child as a qualifying child, the child is treated as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the child is treated as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.View on the source
Form 1040 Instructions Page 40
you won’t be allowed to take the credit for 2 years even if you are otherwise eligible to do so. If you fraudulently claim the EIC, you won’t be allowed to take the credit for 10 years.View on the source
Form 1040 Instructions Page 40
Refunds for returns claiming the earned income credit TIP can’t be issued before mid-February 2026. This delay applies to the entire refund, not just the portion associated with the earned income credit.View on the source
Form 8867 Instructions Page 2
Keep all five of the following records for 3 years from the latest of the dates specified later in Document Retention.View on the source
Form 8867 Instructions Page 2
a. A copy of Form 8867.View on the source
Form 8867 Instructions Page 2
b. The applicable worksheet(s) or your own worksheet(s) for any credits claimed (see Due Diligence Requirements, later).View on the source
Form 8867 Instructions Page 2
c. Copies of any documents provided by the taxpayer on which you relied to determine the taxpayer’s eligibility for the credit(s) and/or HOH filing status and to figure the amount(s) of the credit(s).View on the source
Form 8867 Instructions Page 2
d. A record of how, when, and from whom the information used to prepare Form 8867 and the applicable worksheet(s) was obtained.View on the source
Form 8867 Instructions Page 2
e. A record of any additional information you relied upon, including questions you asked and the taxpayer’s responses, to determine the taxpayer’s eligibility for the credit(s) and/or HOH filing status and to figure the amount(s) of the credit(s).View on the source
Form 1040 Instructions Page 43
Also, don’t file Form 8862 or take the credit for the: • 2 years after the most recent tax year for which there was a final determination that your EIC claim was due to reckless or intentional disregard of the EIC rules, or • 10 years after the most recent tax year for which there was a final determination that your EIC claim was due to fraud.View on the source
Maya and Jon are the parents of a 9-year-old who meets the qualifying-child tests for both of them. They do not file a joint return, both claim the child for the EIC, and the child lived with Maya for 8 months and with Jon for 4 months in 2025. Under the tie-breaker rules, which is correct?
The adoption credit converts the reasonable, necessary costs of a legal adoption — fees, counsel, court costs, travel, re-adoption of a foreign child — into a credit capped per eligible child: any child under 18, or any disabled person unable to care for themselves. For 2025 the per-child maximum is $17,280, phasing out across MAGI $259,190 to $299,190. Stepparent adoptions, surrogate arrangements, reimbursed costs, and amounts paid with excluded employer benefits never enter the base.
Timing follows the child. A U.S. child's expenses count the year after payment (the year of payment once final), and the credit may be allowable even for an attempted or unsuccessful adoption. A foreign child's expenses count only once the adoption is final. A state or tribal special-needs determination for a U.S. child unlocks the maximum without any paid expenses.
The $17,280 then splits: up to $5,000 per child may be refundable, figured separately for each child, while the balance is nonrefundable against current tax. Whatever nonrefundable balance the tax cannot absorb carries forward up to five years, permanently nonrefundable — a carryforward can never turn refundable in a later year.
A couple with MAGI of $140,000 paid $20,000 of qualified expenses adopting one eligible U.S. infant, final in 2025, with no employer assistance. The $17,280 per-child maximum caps the credit base; the $2,720 above it never counts. Of the $17,280, up to $5,000 is refundable and the $12,280 balance is nonrefundable. If their tax absorbs only $10,000 of the nonrefundable portion, the remaining $2,280 carries forward as a nonrefundable credit for up to five years.
Form 8839 Instructions Page 1
2025 maximum credit. The maximum credit (the total of the nonrefundable and refundable portion) and the exclusion for employer-provided benefits are both $17,280 per eligible child in 2025. This amount begins to phase out if you have modified adjusted gross income in excess of $259,190 and is completely phased out for modified adjusted gross income of $299,190 or more.View on the source
Form 8839 Instructions Page 1
Up to $5,000 of adoption credit is refundable. Up to $5,000 of your adoption credit may be refundable. The amount of the refundable credit portion is determined separately for each eligible child.View on the source
Form 8839 Instructions Page 2
An eligible child is: • Any child under age 18. If the child turned 18 during the year, the child is an eligible child for the part of the year they were under age 18. • Any disabled individual physically or mentally unable to take care of themselves.View on the source
Form 8839 Instructions Page 3
If the eligible child is a U.S. citizen or resident, you can take the adoption credit or exclusion even if the adoption never became final.View on the source
Form 8839 Instructions Page 4
You may be able to claim an exclusion or credit for the adoption of a U.S. child with special needs even if you didn't pay any qualified adoption expenses.View on the source
Form 8839 Instructions Page 8
can be carried forward as a nonrefundable adoption credit to the next five years or until used, whichever comes first. You can’t claim any of the $2,280 carryforward as a refundable adoption credit since the carryforward remains a nonrefundable credit.View on the source
A couple finally adopts a U.S. child with special needs in 2025. The state determined the child could not return home and would not be adopted without assistance. They paid $2,000 of qualified expenses and never claimed an adoption credit for this child. Which is correct?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.