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Do I Qualify for Earned Income Credit While on Unemployment?

Updated for Tax Year 2014


OVERVIEW

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


As the name implies, to be eligible for the Earned Income Credit you must “earn” income by providing services, such as through employment. However, receiving unemployment benefits doesn’t mean you’re automatically ineligible for the credit but 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 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 each qualifying child. It is also higher for married taxpayers than for single ones. However, if you file your return using the married filing separately filing status, you’re automatically ineligible for the credit.

Your AGI, 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 credit, BOTH your “Earned Income” (which we discussed above) AND your AGI must be below the applicable limit. It is possible for your earned income to be below the threshold but for the AGI to be above the threshold because of the addition of unemployment compensation to AGI. This would 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. We also have a simple EIC calculator mobile app that can help you determine your eligibility: EITC Finder.

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, claiming the foreign earned income exclusion on Form 2555 or 2555-EZ will render you ineligible for the tax credit.

Maximum investment income

Eligibility for the Earned Income Credit also requires that your investment income for the year not exceed $3,150. Your investment income never includes the money you earn in your profession and it does not include unemployment compensation. It does, however, include any capital gains you got from investments such as stocks and bonds, interest from a bank account, and dividends.

Again, 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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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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