Can state tax refund for 2020 tax year received after filing self-prepared itemized tax returns in 2023 count as Earned Income for determining EITC and ACTC eligibility?

[neelay_das]

In 2023, I self-prepared and filed my 2020 tax year return, where I itemized deductions and deducted state and local taxes and then received a state tax refund. For 2023 tax year return, which I am working on right now, can I include the state tax refund, as Earned Income (EI), in order to meet the minimum EI eligibility requirements for Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC), considering that the income meets the definition of Earned Income here https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned..., where I worked for myself by self-preparing the tax return to earn that income as a refund from the state? If so, TurboTax Home and Business 2023 does not let me count that as Earned Income and because of that I'm missing out on EITC and ACTC, as I don't have any other earned income for 2023. Can Turbo Tax software please be updated to include State and Local Tax Refunds to be counted as part of Earned Income for this scenario?

[xmasbaby0]

No.    A state or local income tax refund is not "earned" income.   In fact, if you itemized deductions the previous tax year, a state or local refund is considered to be taxable income.   But you did not "earn" the income by working---preparing your own tax return is not "work" that counts for getting earned income credit or the child tax credit.  

[neelay_das]

Thanks for your response.  Legally,  I see that self-preparation of tax returns matches the description of work done for myself and per IRS definition of earned income any income earned as a result of work done for myself counts as earned income. Is there precedent you are aware of where IRS has rejected accounting such income as earned income?

[xmasbaby0]

You are confused.   If you were self-employed you can deduct the cost of tax preparation as a business expense on a Schedule C where you enter your business expenses.  Using do-it-yourself- tax software to prepare your own tax return is not "work" for which you are being paid and is not earned income for which you can get EIC.   

[neelay_das]

Paying for tax preparation software is not same as self-preparing tax returns using the software, which is work done for self and any tax refund earned as a result is income. IRS recognizes state and local tax refunds as income,  when itemizing deductions and deducting state and local taxes and I don't see anywhere where this does not fit the definition of earned income when work was done for self by self-preparing the tax returns to earn this income. Please show me any precedent,  where such income has been rejected by IRS from being accounted as earned income. 

[VolvoGirl]

Filling out your own tax return is not work you get paid for.  A Refund is not compensation from working.  A refund is a return of your own money from withholding or from refundable tax credits.  Nobody is paying you to file your return.   Earned income is only W2 wages and a net profit from self employment income on schedule C.  It is for work other people pay you.

See IRS pub 596 page 7 for what Earned Income includes

https://www.irs.gov/publications/p596  

[VolvoGirl]

On that link you posted in your top question which Types of Income do you think a state refund falls under?

[LenaH]

Please click here for the IRS definition of earned income. A state tax refund received from self-preparing your own tax return is not earned income. A refund is a reimbursement for the excess amount paid in taxes to the government.

@neelay_das 

[DoninGA]

https://www.law.cornell.edu/uscode/text/26/32#c_2

(2)Earned income

(A)The term “earned income” means—

(i)

wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus

(ii)

the amount of the taxpayer’s net earnings from self-employment for the taxable year (within the meaning of section 1402(a)), but such net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f).

(B)For purposes of subparagraph (A)—

(i)

the earned income of an individual shall be computed without regard to any community property laws,

(ii)

no amount received as a pension or annuity shall be taken into account,

(iii)

no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account,

(iv)

no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account,

(v)

no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act shall be taken into account, but only to the extent such amount is subsidized under such State program, and

(vi)

a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income.

[VolvoGirl]

Another main reason for what is earned income is that you paid Social Security and Medicare tax on it.  Like for a job the employer takes out SS & Medicare from your paychecks.  It will be on your W2 boxes 4 & 6. 

For self employment you pay the 15.3% SS & Medicare as the Self Employment tax on a gross profit of $400 or more.  Self Employment tax will be on Schedule SE.  It is in addition to any regular income tax you pay on the income.