Is ordinary income from the sale of stock from an ESPP account considered earned income eligible for the EIC?

[dllr597387]

The IRS resource guide states that one of the qualifiers for the EIC is "This credit is called the “earned income” credit because, to qualify, you must work and have earned
income.".  Since I have not worked since 2017 the statement above appears to disqualify me for the EIC but TT always puts the ordinary income portion of the ESPP sale on line 1 of 1040 and adds the EIC to my taxes.

[Mike9241 · Accepted solution]

IRS publications are not official.  they may even be inaccurate. if you use them and they are incorrect and you owe additional taxes subject to the actual tax laws, there is nothing you can rely on for relief

this is from the actual code section for the EIC 

(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.

there is no mention of actually having to work for the year of the EIC

the regs are also silent on having to work in the year you're taking the EIC

[dllr597387]

Thanks for that information.  My luck they would use the publication against me and remove my EIC privileges for 2 years or worse 10 years.  Probably saver to just override TT and report it as other income.

[GeorgeM777]

To follow-up on the comments from @Mike9241, you mentioned that your income came from the sale of ESPP shares.  The typical ESPP discount is 15% and that discount is generally considered a form of compensation.  Thus, that may be why you are seeing some portion of your ESPP sales on line 1 of Form 1040.  If you do have to report the discount as a form of compensation, report it as a form of compensation rather than as other income.  

@dllr597387

[dllr597387]

I suppose I can keep the ordinary income portion on line 1 and remove the credit.  Besides the risk of claiming an ineligible EIC, I really would rather not have to file my taxes manually.  TT does not allow electronic filing of taxes where the EIC is being claimed and the earned income can't be proved. 

[dllr597387]

Though it was not specific to my situation, as mentioned by Mike, I am marking @Mike9241 reply as the best solution.  Thanks all that replied.