What Disqualifies You From Earned Income Credit?

The Earned Income Credit (EIC) is a tax benefit designed to provide financial relief to low- and moderate-income workers while encouraging employment. However, not everyone qualifies, and understanding the disqualifying factors is crucial for taxpayers seeking to claim the credit.

Several criteria can disqualify individuals from claiming the EIC, including residency status, filing status, income requirements, Social Security number issues, dependent qualifications, and prior bans on claiming the credit.

Non-Resident Alien Status

A key disqualifier for the EIC is non-resident alien status. Under Internal Revenue Code 32(c)(1)(E), individuals classified as non-resident aliens for any part of the tax year are ineligible. This classification is determined by the substantial presence test or possession of a valid green card. The substantial presence test requires individuals to be physically present in the U.S. for at least 31 days during the current year and 183 days over the last three years, calculated using a specific formula.

Married individuals who are non-resident aliens may qualify if their spouse is a U.S. citizen or resident alien and they elect to be treated as residents for tax purposes. This election requires filing a joint tax return and submitting a signed statement from both spouses. However, this choice subjects their worldwide income to U.S. taxation, which may not always be advantageous.

Filing Status Restrictions

Filing status plays a critical role in EIC eligibility. Taxpayers filing as “Married Filing Separately” are disqualified to prevent abuse of income and deduction rules. “Single” and “Head of Household” statuses are generally acceptable if other requirements are met. For “Head of Household,” taxpayers must maintain a home for a qualifying person and be unmarried or considered unmarried on the last day of the tax year. This status often provides favorable tax benefits, such as a higher standard deduction.

Lack of Earned Income

The EIC is only available to those with earned income, including wages, salaries, tips, and net earnings from self-employment. Investment income, such as dividends or capital gains, does not count as earned income and is subject to a limit. For 2024, the maximum allowable investment income is $11,000. This earned income requirement supports the program’s goal of incentivizing work. Self-employed individuals must carefully track income and expenses, as these affect net earnings. Certain types of compensation, like disability benefits from private insurance or pensions, also do not qualify as earned income.

Disqualified Social Security Number

A valid Social Security Number (SSN) is mandatory to claim the EIC. Both the taxpayer and any qualifying children must have SSNs issued by the Social Security Administration by the tax return’s due date, including extensions. Numbers issued solely for tax purposes, such as ITINs or ATINs, are not acceptable. Filing with an incorrect or missing SSN will result in the rejection of the EIC claim. Taxpayers should ensure their SSNs are accurate and valid well before the filing deadline to avoid complications.

Dependent Rules Not Met

Dependents must meet specific criteria to qualify the taxpayer for the EIC. A qualifying child must satisfy the relationship, age, residency, and joint return tests. The relationship test includes children, stepchildren, foster children, siblings, and their descendants. The age test requires the child to be under 19 at year-end, under 24 if a full-time student, or any age if permanently disabled. The residency test mandates the child live with the taxpayer in the U.S. for more than half the year. Finally, the joint return test disqualifies a married child filing a joint return with their spouse, unless it’s solely to claim a refund.

Prior EIC Ban

A prior ban on claiming the EIC can disqualify taxpayers. The IRS imposes bans as a penalty for fraudulent claims or intentional disregard of the rules. These bans last two years for reckless or intentional disregard and up to ten years for fraud. Taxpayers who have been banned should review past returns to understand the reasons and consult tax professionals to ensure future compliance. While the IRS allows appeals, the burden of proof lies with the taxpayer. Understanding these rules is essential to regaining eligibility and avoiding further penalties.