Earned Income Credit

[bww25]

Does "earned income" include S-Corp K-1 pass through income? In addition, why does the definition link in TT say the earned income value is on line 7 of 1040 (wages, salaries and tips) when that is line 1?  The current version of 1040 actually has a line 7a and 7b!

[M-MTax]

If by "earned" you mean "self employment" then that is not included on an S-CORP's K-1. Shareholders and employees of S-CORPs have earned income that's reported on W-2s and not any K-1s.

[bww25]

Earned income credit is defined by the IRS but TT telling me to use Line 7 of the 1040 makes me uncertain what is included in "earned income."  I have a single-member S-corp and my accountant has deemed it better to pass through those funds on a K-1.  I do not get it as W-2 income.  So clearly, I earned it but does the IRS allow it for the EIC when received in this manner.

[JamesG1]

@bww25

I do not believe it will qualify as earned income for purposes of the Earned Income Tax Credit.

The IRS defines earned income as:

• Taxable income you earned as an employee, such as wages, salaries, commissions, and tips,
• Profits from operating your business or farm,
• Long-term disability pay if received before the minimum retirement age,
• Union strike benefits.

I suspect the K-1 will report on Schedule E.  Use Schedule E (Form 1040 or 1040-SR) to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).  Schedule E is for “supplemental income and loss,” and not earned income.

[bww25]

Thanks James.  The accountant files the corporate return and, hopefully, I have done the right thing by putting that K-1 money on the Schedule E, as you surmised.  It is listed in Part II (k) - Nonpassive Income from K-1.  The confusing thing for me is that it is the direct result of operating my business and I it is considered as income on Line 7, which is what TT told me to use for the EIC number!  Of course, TT also claimed that is the line for "wages, salaries and tips" even though that is line 1.  In addition, there is a Line 7a and 7b!

[VolvoGirl]

Are you looking at 2019?  2019 has line 7a & 7b for Other Income and Total Income.  For 2020 line 7 is Capital Gain or Loss from Schedule D.  

Back in 2017 and prior line 7 was for Wages.  

[bww25]

Yes, sorry.  I was looking at 2019 because I was interested in the "lookback provision" for EIC and you are correct - it is the one with Lines 7a and 7b.  TT tells users in the 2020 TT software to use Line 7 as part of their help in that "lookback" section for where to find the right number in their 2019 return.  You are correct again to point out that Line 7 in the 2020 1040 is Capital Gain/Loss.