The EIC, as its name suggests, require you to have “earnings”, sourced from the act of providing services in exchange for compensation – for example: employment. While you may still be able to claim the credit even if you collect unemployment benefits, you must meet all the requirements of the credit as well. In some cases, the EIC can generate a refund, in situations where your taxes are reduced to zero.
Earned income is money you receive from employment and self-employment activities, per the IRS definition. Unemployment compensation provided by the state is specifically excluded from the definition of earned income. Although, if you worked at all during the year in which you received the unemployment, you may meet the eligibility requirements needed to satisfy the EIC. So, if you worked from January to May 2016, and began receiving unemployment checks in June, you are still considered to have some earned income.
The Earned Income Credit is available to taxpayers with an adjusted gross income (AGI) that is less than the applicable maximum for the year. This threshold is dependent on your filing status and the number of qualifying dependents you claim. Each qualifying child increases the AGI limit, as well as filing a return as a married taxpayer over a single filer. You can’t claim the credit if you file using the status married, filing separately.
Your AGI is calculated by deducting the appropriate “Adjustments to income” as per IRS regulations from the amount of your income subject to taxation. The credit requires that your earned income amount and your AGI BOTH be below the limit.
NOTE: There’s a chance that while your earned income amount may be below the required threshold, your AGI, due to the addition of unemployment compensation, may come in above the limit. In these situations, you are not eligible to claim the credit.
The EIC requires that neither you nor your spouse, if you file a joint return, be a nonresident alien for any period during the tax year.
If you aren’t a US Citizen, you’ll need to have legal documentation allowing residency in the country, or you’ll have to meet the IRS rules for substantial presence, which requires you to be physically present in the country for a set number of days. Additionally, you’ll need a Social Security card without the statement “not valid for employment” if you want to claim the EIC.
U.S. citizens living abroad can’t claim the foreign earned income exclusion on form 2555 or 2555-EZ, otherwise you’ll be unable to claim the tax credit.
To claim the EIC, you can’t have investment income that exceeds $3,150. Investment income doesn’t include money earned through work or unemployment compensation, though capital gains from stock, bonds, bank account interest and dividends are included.