Earned Income

When Hurricane Katrina victims evacuated from the gulf coast, they had no idea how long it would be before their next paycheck. This loss of income not only affected immediate cash flow, but for many of the victims, it could affect two of their refundable tax benefits:
1) earned income credit (EIC) and 2) additional child tax credit. To prevent the victims from potentially losing more income than they relied on to make ends meet, a look-back election for these credits is included in the KETRA (Katrina Emergency Tax Relief Act of 2005).

The look-back election simply states that:

  • Qualified victims of Hurricane Katrina can elect to calculate their EIC and additional child tax credit for tax year 2005 using their earned income from tax year 2004.
  • The earned income from tax year 2005 must be less than the earned income from tax year 2004.
  • The election to use earned income from tax year 2004 applies to both EIC and refundable child tax credit. The taxpayer cannot choose to apply it to just one.
  • For married filing joint taxpayers, this election is available if either spouse is a qualified victim and they both make the election. However, the earned income from tax year 2004 must be the total of each spouse’s income even if they did not file a joint return in tax year 2004. This will allow the joint 2005 income to be compared to joint 2004 income.


    • If using 2004 earned income to calculate the credits will not benefit the taxpayer, then the election should not be chosen. Some common issues that may come up when figuring the 2004 earned income are:
  • If the nontaxable combat pay election was chosen on the 2004 return, then it must also be included in the 2004 earned income for look-back election comparison purposes.
  • If the taxpayer was not required to file a 2004 return, the amount of earned income must be figured as if they had filed a 2004 return.


    • There will not be any new forms added for the look-back election calculation. Instead, tax preparers will report the information on:
  • Form 8812 (Additional Child Tax Credit) which will be revised to add a checkbox on line 4 to indicate that the look-back election was chosen.
  • Forms 1040, 1040A, and 1040EZ, which will have “PYEI” on the dotted line of the EIC entry line to indicate that the look-back election was chosen.

    • From December 2005

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