J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

45.5 Optional Method If 2012 Was a Low-Income or Loss Year

The law provides a small increased tax base for Social Security coverage if you have a low net profit or loss. The increased tax base is called the optional method and is figured in Part II of Section B of Schedule SE. One optional method is for nonfarm self-employment and another for farm income. You may not use the optional method to report an amount less than your actual net earnings from nonfarm self-employment.

Nonfarm method.

You may use the nonfarm optional method for 2012 if you meet all the following tests:

Test 1. Your net earnings (profit) from nonfarm self-employment on Line 31 of Schedule C, Line 3 of Schedule C-EZ, or Box 14 (Code A) of Schedule K-1 (Form 1065) are less than $4,894.

Test 2. Your net nonfarm profits are less than 72.189% of your gross nonfarm income.

Test 3. You had net earnings from self-employment of $400 or more in at least two of the following years: 2009, 2010, and 2011.

Test 4. You have not previously used this method for more than four years. There is a five-year lifetime limit for use of the nonfarm optional base. The years do not have to be consecutive.

- - - - - - - - - -

Filing Tip

Optional Method

Electing the optional method to increase the base for Social Security coverage may also increase earned income for dependent care and earned income credit purposes.

- - - - - ...