Investment Income and EITC

By | April 24, 2014

The EITC is meant to help taxpayers of modest means support themselves. There are certain limits on the amount of un-earned income or investment income that a taxpayer may have to claim the EITC.

Investment Income and EITC

Income from investments, whether it is dividends, rental properties or inheritance, disqualify you from the EITC if you a have over $ 3,200 in a year. This would most likely be the types of things that are reported on a Form 1099. Other disqualifying income are child support, retirement, Social Security benefits, unemployment benefits and alimony. The benefits received for work in prison do not count toward the credit. There are special EITC rules for members of the military, ministers, members of the clergy and those receiving disability benefits. Find out more about the special EITC rules.


Combat Pay Rules for IRS Purposes and EITC

You do not have to report your nontaxable pay you receive as a member of the Armed Forces as earned income for EITC. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). The amount of your nontaxable combat pay is on your Form W-2, in box 12, with code Q.

But, you and your spouse can each choose to have your nontaxable combat pay included in your earned income for EITC. Including it as earned income may decrease the amount of tax you owe and may mean a larger refund. Calculate your taxes with the combat pay as earned income and without to find out what’s best for you.


Investment Income and EITC

If you make the election, you must include in earned income all nontaxable combat pay you received. You can’t choose to include only a part of the nontaxable combat pay in earned income. That is,

  • You can choose to include all your nontaxable combat pay and your spouse can choose zero
  • You can choose to include zero amount of your nontaxable combat pay and your spouse can choose to include all of it
  • You can both choose to include all your nontaxable combat pay
  • You can both choose not to include your nontaxable combat pay

Some disability retirement benefits qualify as earned income to claim EITC. Also, you may claim a relative of any age who is totally and permanently disabled and fits all other eligibility  requirements.