WHAT IS 'Disqualifying Income'

Disqualifying income is a type of income that can prevent an otherwise eligible low- or moderate-income taxpayer from receiving the earned income credit (EIC) when filing taxes. To determine whether income qualifies for the EIC, a taxpayer should consult IRS Publication 596. If a taxpayer’s income qualifies to claim the EIC on a federal income tax return, they may also be eligible to take a similar credit on their state and local returns.

BREAKING DOWN 'Disqualifying Income'

Disqualifying income consists of investment income, such as taxable and tax-exempt interest, dividends, pensions and annuities, net income from rents and royalties, net capital gains and net passive income not received as a result of self-employment. Earned income also excludes child support and alimony, retirement income, Social Security benefits, workers’ compensation benefits, nontaxable foster care payments, veterans’ benefits and unemployment compensation. A child’s tax-exempt interest and dividend income reported on a parent’s return are also considered disqualifying income.

In 2017, income derived from investments, be it through rental properties, stock dividends or inheritance, could not exceed $3,450. The EIC also cannot be claimed if a taxpayer has filed Form 2555 for Foreign Earned Income or Form 2555-EZ for Foreign Earned Income Exclusion, which must be filed to exclude income earned in foreign countries from gross income.

In order to qualify for the EIC, taxpayers must have a valid Social Security number by the tax return due date, be a United States citizen or resident alien for the entire year, and the filing status cannot be married filing separately. Children must meet relationship, age, residency and joint return tests, and can’t be claimed by more than one person. If a taxpayer does not have a qualifying child, they must be at least age 25 but under age 65, cannot be the dependent of another person and must have lived in the United States for at least half of the year. Income earned for work performed while an inmate in a penal institution is also disqualifying income when calculating the EIC.

Disqualifying Income Limits

Taxpayers are disqualified from receiving the EIC if they receive more than a certain amount of income, which is adjusted annually for inflation. For unmarried taxpayers filing individually in 2017, adjusted gross income was required to be less than $48,340 with three or more qualifying children, $45,007 with two qualifying children, $39,617 with one qualifying child or $15,010 without qualifying children. For married taxpayers filing jointly in 2017, the maximum income to claim the credit was $53,930 with three or more qualifying children, $40,597 with two qualifying children, $45,207 with one qualifying child or $20,600 without qualifying children.

  1. IRS Publication 972: Child Tax ...

    IRS Publication 972 is a document published by the IRS to provide ...
  2. Cash Basis Taxpayer

    A cash basis taxpayer is a taxpayer who reports income and deductions ...
  3. Income

    Income is money that an individual or business receives on a ...
  4. Child And Dependent Care Credit

    Child and dependent care credit is a non-refundable tax credit ...
  5. IRS Publication 503: Child And ...

    IRS Publication 503 is a document published every year by the ...
  6. Investment Income

    Investment income is that coming from interest payments, dividends, ...
Related Articles
  1. Taxes

    How to File Your Child's First Income Tax Return

    Use this quick parental guide to help your child learn the tax-filing process and establish good habits.
  2. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  3. Personal Finance

    Gay Marriage and Taxes: Everything You Should Know

    Thanks to a Supreme Court ruling, same-sex couples can now take advantage of gay marriage tax benefits or may end up paying a "marriage penalty."
  4. Taxes

    5 Groups That Don't Pay Taxes

    Now that you've paid your share, find out who didn't have to pay taxes this year.
  5. Retirement

    Social Security Benefits for Dependents

    A child may be eligible to receive part of a parent's Social Security benefits in three ways.
  6. Taxes

    How Fixed Income Threshold Reduces Social Security Benefits

    The use of fixed income threshold amounts to an ongoing tax increase and a means test on Social Security beneficiaries. Here's how.
  7. Personal Finance

    Tax Credits For Families

    Sometimes it actually pays to have kids if you are looking for significant tax breaks.
  8. Managing Wealth

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  9. Taxes

    Divorced? 7 Tax Traps to Avoid

    Filing your taxes is complicated enough, but it can become even more challenging after a divorce.
  10. Retirement

    Social Security Benefits for Children: How They Work

    There are millions of children in tough situations who receive Social Security benefits each month to help with finances. Here's who qualifies.
  1. What is the difference between gross income and earned income?

    The difference between earned income and gross income is an important one come tax time. Find out how the IRS uses both to ... Read Answer >>
Trading Center