Disabled Individuals and EITC
There are several requirements to qualify for the Earned Income Tax Credit (EITC) (IRC Sec 32), one of which is to have earned income. Many taxpayers and tax preparers alike overlook the fact that long-term disability benefits received prior to the minimum retirement age (generally age 55) are treated as earned income for purposes of the EITC computation (IRS Publication 4808, Disability and EITC and Page 53 Pub 17 (2021).
Earned income for EITC purposes includes the following amounts:
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The amount of any disability benefits attributable to the employer's payment of disability policy premiums (Chief Counsel Advice 199916041). However, nontaxable disability income attributable to premiums paid by an employee is not “earned income” for purposes of the EITC.
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Long-term disability benefits to an individual retired on disability are earned income only until the individual reaches minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled.,
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That means, for 2022, joint-filing taxpayers with no qualifying children and with earned incomes up to $22,610 can qualify for EITC while those using other filing statuses qualify up to $16,480 of earned income. The maximum credit for 2022 is $560 for those without a qualifying child., If the taxpayer has qualifying children, the limits and the credit are substantially higher (Rev Proc 2021-45)
Individuals often don’t not file a return because their income is below the filing threshold, and therefore, miss out on claiming the credit. Some people also mistakenly believe that receiving the EITC may impact their eligibility for Social Security disability benefits, Medicaid, food stamps, or housing assistance (IRC Sec 32(l)).