As the name implies, to be eligible for the Earned Income Credit you must “earn” income such as through employment. However, receiving unemployment benefits doesn’t mean you’re automatically ineligible for the credit. There are other requirements you’ll also need to satisfy to claim the EIC. If you do, the credit can reduce your taxes, or even create a refund.
Note:
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use either their 2020 or 2019 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).
Unemployment compensation
The IRS defines “earned income” as the compensation you receive from employment and self-employment. Specifically excluded from this definition is any unemployment compensation you receive from your state.
However, as long as you worked or were otherwise self-employed during the same year you started receiving unemployment checks, you may still be eligible to claim the Earned Income Credit.
AGI limitations
The Earned Income Credit is only available if your adjusted gross income, or AGI, is less than the applicable maximum for the tax year. The applicable maximum AGI depends on your filing status and the number of qualifying children.
- The applicable maximum AGI increases for up to three qualifying children.
- It's also higher for married taxpayers than for single ones.
- If you file your return using the married filing separately filing status, you’re automatically ineligible for the credit.
Your adjusted gross income, which you can find on the first page of your tax return, is equal to: Your total income subject to the income tax, minus the deductions the IRS refers to as “adjustments to income.”
In order to be eligible for the Earned Income Credit:
- you must have “Earned Income” (which we discussed above) AND
- your Adjusted Gross Income (AGI) must be below the applicable limit.
It's possible for your earned income to be below the threshold but for your total income, and therefore your AGI, to be above the threshold because of the addition of unemployment compensation. This could make you ineligible for the Earned Income Credit.
To find the AGI thresholds for your specific situation, see: IRS Publication 596. If you use TurboTax to prepare your taxes, we’ll ask simple questions, do all the calculations and tell you whether or not you’re eligible for the credit.
