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Observant1
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

The EIC table indicates that my EIC amount should be more than 501 because my earned income is less than my AGI.
17 Replies
RayW7
Expert Alumni

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

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.

Bsch4477
Level 15

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

The calculation of EIC looks at earned income but also at unearned income by including your AGI.  This prevents a wealthy person with low earned income but a high AGI due to, for example, investments from getting the maximum credit.  See the EIC worksheet. https://www.thetaxbook.com/updates/TheTaxBook/Client%20Tax%20Tools/Earned_Income_Credit_EIC_Workshee...

 

VolvoGirl
Level 15

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

The expert answer above is kind of long and I found it hard to follow.  And I think there's a typo in it.

 

Both your earned income and AGI have to be less than the table.  See, EIC Qualifications

https://ttlc.intuit.com/community/credits-and-deductions/help/what-are-the-qualifications-for-the-ea...

 

If you had a lower Income last year you can use 2019 income.  The special lookback rule will allow lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income could reduce the amount they are eligible for.

 

You can look back and use your 2019 income for the EIC credit instead of 2020.  See this post  https://ttlc.intuit.com/community/taxes/discussion/i-m-at-a-section-asking-me-do-you-want-to-use-las...

rpharbis
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

Commenting on paragraph beginning "If you had a lower income last year you can use 2019 income". It's not clear from this or from the IRS instructions what you can do in a situation like mine. I met the EIC criteria for 2019 with both earned income and AGI below the threshold. In 2020 my earned income was much lower but unemployment compensation due to the pandemic put me over the AGI threshold for the EIC. I should be able to use the lookback rule to apply both my 2019 earned income and 2019 AGI (which are the same number). However, the purchased TurboTax Deluxe does not allow me to enter the 2019 data and won't give me any EIC. Does anyone have a workaround for this issue?

Bsch4477
Level 15

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

I wish we could make the law conform to what we think it should be but the reality is that the look back considers only the earned income. 

AmyC
Expert Alumni

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

No, the higher of the 2 years earned income is the one used. The lookback election is available only if 2019 was higher earned income.  IRS Publication 596. says: 

Election to use prior year earned income. 

You can elect to use your 2019 earned income to figure your 2020 earned income credit (EIC) if your 2019 earned income is more than your 2020 earned income. To make this election, enter "PYEI" and the amount of your 2019 earned income on the dotted line next to Form 1040 or 1040-SR, line 27.

 

 

@VolvoGirl

@rpharbis

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Observant1
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

You misread my question. I know the difference between earned and unearned income. And no one is asking for the law to confirm tl what I think it should be! Smart ass!!

Observant1
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

All of these “experts” lack the ability to comprehend my issue. I KNOW THAT ALL INCOME IS USED (AGI) TO DETERMINE EIC QUALIFICATIONS. I ASKED ABOUT THE CALCULATION USED TO DETERMINE THE AMOUNT OF EIC WHICH IS EARNED INCONE ONLY!! The extensive responses didn’t address the miscalculation error I saw on the tax form.

rpharbis
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

If 2019 earned income is higher than 2020, one may still not be able to use the lookback if 2020 AGI is over the  threshold. It may be that I was wrong that it was a software issue because there is a separate EIC eligibility test that is not part of the special lookback. Hate to make such an interpretation as a non-professional especially since I'll pay more tax. Any confirmation out there that this is the correct interpretation?

Observant1
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

This is NOT what I was referring to at all. I didn’t even mention the income differences between 2019 & 2020. Please read each question carefully.

Observant1
New Member

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

You’re indirectly answering my question. I don’t have investment income. This is a guess, not an actual response of certainty. Please know that each individual tax situation is different.

DawnC
Expert Alumni

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

Some experts in this thread are answering questions that other community members, such as ''rpharbis'' have asked on this thread.    If your adjusted gross income (AGI) is too high, you don't qualify for the Earned Income Credit, even if your earned income shows an amount on the table.   

 

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.

See page 2 of this IRS document.   Your AGI is on line 11 of your Form 1040.  

 

@rpharbis  That is correct.  The lookback is only used for ''earned income'' and you can use 2019 if it was higher in 2019.   The AGI part of the calculation still comes from your 2020 tax return.    Hopefully, the unemployment compensation will help to make up for the lost credit in situations like yours.    ;(   

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rk666
Level 1

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

I'm "self-employed" but have been receiving unemployment insurance and PUA for all of 2020. I earned $0 in 2020 from my self-employment, and have no "earned income" in 2020, so my 2019 earned income is obviously higher than my 2020 earned income (zero) - but I have no idea if I can calculate my 2020 EIC on my 2019 earned income or if that's not allowed. The "more help" button on that page just shows "content not available" on turbotax.

 

Do I qualify to calculate my EIC based off 2019 earned income? 

VolvoGirl
Level 15

Why is the system adding in unearned income, such as unemployment to calculate the EIC amount. That is wrong.

I think so.  The special lookback rule will allow lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income could reduce the amount they are eligible for.

 

You may use your 2019 income for the Child Tax Credit if your 2019 earned income was morethan your 2020 earned income.  If your 2020  income was more than your 2019 income then you cannot use the 2019 income.

 

 

You can look back and use your 2019 income for the EIC credit instead of 2020. How to use the Lookback provision

https://ttlc.intuit.com/community/earned-income-credit/help/how-do-i-use-the-lookback-provision-to-m...

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