Earned Income Credit makes return not eligible to E-File

[clopez8651]

Good afternoon.

I just finished doing our personal taxes using TurboTax Premier.

The system automatically calculated an Earned Income Credit.  However, when I went to e-file my federal return, it told me that it was ineligible for e-filing.

The message states "Your Earned Income Tax Credit is based on non-documented earned income".

We have never received this credit in prior years.  There is no income that I entered that was non-documented.  I cannot seem to find out how this was calculated and if I can over-ride it manually so that I can e-file my return.

Can anyone help?

[GeorgeM777]

If you can clarify for us the nature of your income that may help us to better understand your tax situation.  For example, what type of income did you enter into TurboTax, i.e., W-2 wages, any capital gains, dividends, or interest income.  Also, did you have self-employment income?  If so, what was the approximate amount of net profit from your business?

@clopez8651 

[clopez8651]

Greetings, thank you for your reply.

The income I entered into TurboTax consists of:

Investment income (Interest/Dividends)

Capital Gains (losses last year)

Schedule K1 income from an S-Corp

Hope this helps.  Looking forward to your reply.

[DawnC]

Your share of S corporation income isn't considered earned income or self-employment income subject to SE tax.

Take a look at your Earned Income Credit forms.  It looks like you are using the desktop product and if so, you can click on Forms in the upper right-hand corner to preview all of your tax forms.    There should be a Schedule EIC and the EIC Worksheet In your list of forms.   On the EIC worksheet, look at Line 6.   What amounts are included?   The credit is calculated based on the earned income on Line 6.  

Here is a list of Earned Income that is included when calculating the credit.   Investment, capital gains, and your share of S-corp income are not Earned Income.   So, there is some other income reported on your return that is qualifying you for the EIC.   

[clopez8651]

Hello.  Thank you for the response.

I took a look at the EIC calculation worksheet.   It appears as though the amount of the credit corresponds exactly to the amount of the 1/2 self employment tax deduction (SE taxes on our Schedule K1 income).

I pulled up last year's return and it did NOT generate an earned income credit based on the SE tax deduction, so not sure if something has changed in regards to this.

Any way to fix this so I can file the return online?  Thanks in advance.

[AmyC]

The only way to fix the EIC issue would be to not claim it and have a tax liability. The program really wants you to claim all that you are entitled. To not claim the EIC, you would have to say that you are not qualified and you don't want to do that.

EIC is based on income and age, dependents may play into the credit. Since your k-1 has SE tax, you are actively involved in the business. My guess is that you had lower income this year and it triggered the EIC.

EIC is a refundable credit, it is not limited to the tax liability so this could be an odd happenstance that they match. 

When you mail your return, be sure to use tracking to ensure its safe arrival and protection of your information.

Reference: Earned Income Tax Credit (EITC) | Internal Revenue Service

[clopez8651]

Hello and thanks for the reply.

I did an experiment and went back into the return and removed the SE taxes on our Schedule K1 income, and it came back with no Earned Income Credit whatsoever and allowed for E-File.  To me, that would indicate that the issue is indeed the deductible portion of the SE taxes on our Schedule K1 income.   

Any other thoughts or feedback would be appreciated.   Just trying to avoid having to print and mail a bunch of pages.  Thanks again.

[AbrahamT]

If from what you are telling us that the earned income is being generated from that self employment tax deduction and you got it properly eliminated, then you should be good to go. Bear in mind though that you may have had some self employment income from Box 14 on that k-1 so make sure that the income doesn't somehow also get eliminated when you get rid of your self emplyment tax deduction. I suspect that you may have self employment tax this year from an entry on that Box 14 which you didn't have in prior years. Box 14 is self employment income from the company that is issuing you the K-1. As long as you don't eliminate this reported income from your tax return, then you'll be fine  

[clopez8651]

Hello and thanks for the reply.

I took a look at our Schedules K1 and there is no amount in Box 14.

Since I do wish to pay SE taxes on our Schedule K1 income, it looks like there is no way to do this without the program generating the Earned Income Credit for the amount of the 50% SE tax deduction.    I am unclear as to why this makes the return not eligible for E-File.  

[AmeliesUncle]

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@clopez8651 wrote:

Since I do wish to pay SE taxes on our Schedule K1 income, 

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As was mentioned above, income form a S-corporation K-1 is NOT subject to SE tax.  It is NOT an option to pay SE tax.  Did you somehow try to force SE tax on it?

If you worked for the S-corporation, you probably SHOULD have also received a W-2 from the S-corporation for "compensation" for the work you performed.