Disabled Individuals May Be Missing out on the Earned Income Tax Credit

Article Highlights:
  • EITC Overview 
  • Earned Income Requirement 
  • Disability Income as Earned Income 
  • Credit Phase-Out 
  • Amending Open Years 
The Earned Income Tax Credit (EITC) is a tax benefit for working people who have low to moderate income. It provides a tax credit that is treated like tax withholding: it goes to pay an individual’s tax liability, and any excess is paid to the individual in the form of a tax refund.

There are several requirements to qualify for the EITC; most important is having earned income. Many taxpayers overlook the fact that long-term disability benefits received prior to the minimum retirement age are treated as earned income for purposes of computing the 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. However, nontaxable disability income from policies whose premiums the employee paid and Social Security benefits are not “earned income” for purposes of the EITC. 

  • Long-term disability benefits to an individual who is retired on disability are only earned income until the individual reaches the minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled. 
The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases until it reaches a plateau, where it remains constant at the maximum credit amount until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage, and no credit is allowed once the income exceeds the top of the phase-out range. The following table illustrates the values for computing the credit for 2017 for taxpayers with no qualifying children.

Filing
Status
Credit %
Plateau
Maximum
Credit
Phase-out
Threshold Starts
Phase-out
Threshold Ends
Joint Filing
7.65
$6,670
$510
$13,930
$20,600
Others
7.65
$6,670
$510
$8,340
$15,010

The limits and the credit are substantially higher if the taxpayer also has qualifying children.

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. Those who qualify and have missed the credit in prior years can still amend their past three years of tax returns if filed within three years of the original April due date for the return.

Many 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.

If you have questions related to the EITC, please give this office a call.