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).
Earned income for EITC purposes includes the following amounts:
>>The amount of any disability benefits attributable to the employer's payment of disability policy premiums (Chief Counsel Advice 199916041). However, non-taxable disability income attributable to premiums paid by an employee is not “earned income” for purposes of the EITC.
>> 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 (2016 Pub 17, Pg. 233). That means, for 2017, joint-filing taxpayers with no qualifying children and with earned incomes up to $20,600 can qualify for EITC while those using other filing statuses qualify up to $15,010 of earned income. The maximum credit for 2017 is $510. If the taxpayer also has qualifying children the limits and the credit are substantially higher (IR-2017-07).
The IRS estimates that up to 1.5 million people who are receiving long-term disability retirement benefits are missing out on claiming the EITC. For those that qualify and missed the credit in prior years, they can still amend their 2014, 2015, and 2016 returns for a refund.
Individuals may 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)).