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  5. Do I Qualify for Earned Income Tax Credit While on Unemployment?

Do I Qualify for Earned Income Tax Credit While on Unemployment?

Updated for Tax Year 2022 • January 12, 2023 06:47 PM


OVERVIEW

Receiving unemployment benefits doesn't mean you're automatically ineligible for the Earned Income Credit, but there are other requirements you'll also need to satisfy to claim the EIC.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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Key Takeaways

• Receiving unemployment benefits does not automatically make you ineligible to receive the credit. You may be eligible to claim the Earned Income Tax Credit if you earned income from a job or self-employment for at least part of the tax year.

• You can only receive the Earned Income Credit if your adjusted gross income (AGI) is below the applicable maximum for the tax year. The applicable maximum AGI varies, depending on your filing status and the number of qualifying children.

• The unemployment compensation you receive counts toward your AGI. You may be ineligible for the Earned Income Credit if your earned income and unemployment benefits exceed the maximum AGI when added together.

• You are ineligible for the Earned Income Credit if you or your spouse (if filing jointly) was a nonresident alien at any time during the tax year. If you’re a US citizen or resident and you live abroad, you typically cannot receive the tax credit.

Earned Income Tax Credit

As the name implies, to be eligible for the Earned Income Tax 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.

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 Tax 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

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 have to 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.

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 their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC). For 2021, you can use whichever year's income, 2019 or 2021, that provides the highest credit.

 


 

TurboTax Tip: If your investment income exceeds $10,300 for the year (tax year 2022), you will not be eligible for the Earned Income Credit. Investment income includes interest from a bank account, dividends, and capital gains from the sale of investments such as stocks or bonds.

 


 

Citizen or resident

You will not be eligible for the Earned Income Credit if you or your spouse (if filing jointly) was a nonresident alien at any time during the tax year.

If you don’t have United States citizenship, you must either have a green card that allows you to reside in the country, or satisfy the IRS substantial presence test.

  • The test requires you to be physically present in the U.S. for a certain number of days.
  • You also have to have a valid Social Security card that does not include the phrase “not valid for employment.”
  • If you’re a U.S. citizen or resident who lives abroad, you ineligible for the tax credit.

Maximum investment income

Eligibility for the Earned Income Credit requires that your investment income for the 2022 tax year not exceed $10,300. Your investment income doesn't include the money you earn in your profession and it does not include unemployment compensation.

Investment income does, however, include:

  • Capital gains you got from investments such as stocks and bonds
  • Interest from a bank account
  • Dividends

When you use TurboTax to prepare your taxes, we’ll ask straightforward, easy-to-answer questions about your income and life, and do all the work to determine whether you qualify for the EIC or other deductions and credits.

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