Military
Nontaxable combat pay election
You can elect to have your nontaxable combat pay included in earned income for the earned income credit. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q.
Electing to include nontaxable combat pay in earned income may increase or decrease your EITC.
Nontaxable military pay
Nontaxable pay for members of the Armed Forces is not considered earned income for the EITC. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). See Publication 3, Armed Forces’ Tax Guide, for more information.
Members of the Clergy
Net earnings from self-employment. You may have net earnings from self-employment if:
Minister’s housing. The rental value of a home or a housing allowance provided to a minister as part of the minister’s pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned
income for the EITC (unless the taxpayer has an approved Form 4361 or Form 4029)
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Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or
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Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits.
Each approved form exempts certain income from social security taxes. Each form is discussed in this section in terms of what is or is not earned income for purposes of the EITC.
Form 4361. Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. Amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches.
Form 4029. Even if you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation count as earned income. However, amounts you received as a self-employed individual do not count as earned income. Also, in figuring earned income, do not subtract losses on Schedule C, C-EZ, or F from wages on line 7 of Form 1040.
Disability Benefits
If you retired on disability, benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age. Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Report taxable pension payments on Form 1040, lines 16a and 16b, or Form 1040A, lines 12a and 12b.
Benefits such as Social Security Disability Insurance, SSI, or military disability pensions are not considered earned income and thus, cannot be used to claim the Earned Income Tax Credit (EITC). You may qualify for the credit only if you, or your spouse, also have earned income.
Claiming children with disabilities. A qualifying child of any age who is totally and permanently disabled can be claimed for the EITC. All other eligibility requirements must also be met. If the qualifying child who is totally and permanently disabled also receives disability benefits, they can still be claimed for the EITC.
Disability insurance payments. Payments you received from a disability insurance policy that you paid the premiums for are not earned income. It does not matter whether you have reached minimum retirement age. If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code “J.”
For additional information on other tax credits and disability benefits, check out Publication 907, Tax Highlights for Persons with Disabilities.
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