You are correct in that income earned in prison or a halfway house doesn't qualify for the Earned Income Credit. However, the above instructions are correct for how to enter this income on your return.
Later in the process, you will have to answer questions to determine if you qualify for the Earned Income Credit. You will reach the screen Do any of these uncommon situations apply? where you will check the box that you earned this income while in prison, or work release or in a related halfway house.
You will then be able to enter the amount that doesn't qualify for the Earned Income Credit.
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