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.

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 2019, income derived from investments, be it through rental properties, stock dividends or inheritance, could not exceed $3,600. The EIC also cannot be claimed if a taxpayer has filed Form 2555 for Foreign Earned Income, 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.

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 2019, adjusted gross income was required to be less than $50,162 with three or more qualifying children, $46,703 with two qualifying children, $41,094 with one qualifying child or $15,570 without qualifying children. For married taxpayers filing jointly in 2019, the maximum income to claim the credit was $55,952 with three or more qualifying children, $52,493 with two qualifying children, $46,884 with one qualifying child or $21,370 without qualifying children.