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The basic EIC is computed in two stages. First, you start with a certain percentage of your earned income up to a certain amount. This is the maximum basic EIC. For 2011, the maximum is $464 if you have no children, $3,094 with one qualifying child, $5,112 if you have two children, and $5,751 if you have three or more children.
Then, you subtract a percentage of the portion of your AGI that exceeds a specified level. For this part of the computation, you must count all your taxable income, whatever the source -- not just earned income. What's more, you must also add in any nontaxable interest you received, any capital losses, any nontaxable retirement plan payments unless they were rolled over into an IRA, and 75 percent of any losses you had in your business or farm. You must also include certain nontaxable earned income, such as 401(k) contributions, nontaxable dependent care and adoption benefits, and the value of food and lodging provided for the convenience of the employer.
The EIC amount is phased down as your income gets higher, and at a certain point it's phased out completely.
To find the actual amount of your EIC, you must complete the EIC worksheets found in the instructions to IRS Form 1040 or 1040A, using the tables that are included with the instructions.
Also, if you are claiming a higher EIC amount because you have one or more qualifying children, you must also complete Schedule EIC and attach it to your tax return. The credit amount will be transferred to Line 64a on Form 1040 or Line 41a of Form 1040A.