Earned Income Credit - Income That is Not Earned

Per IRS Publication 596 Earned Income Credit (EIC), page 8:

Income That Is Not Earned Income

Examples of items that aren't earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers'compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans'benefits, including VA rehabilitation payments. Don’t include any of these items in your earned income.

Earnings while an inmate. Amounts received for workperformed while an inmate in a penal institution aren'tearned income when figuring the earned income credit.This includes amounts for work performed while in a workrelease program or while in a halfway house.

Workfare payments. Nontaxable workfare paymentsaren't earned income for the EIC. These are cash payments certain people receive from a state or local agencythat administers public assistance programs funded underthe federal Temporary Assistance for Needy Families(TANF) program in return for certain work activities suchas (1) work experience activities (including remodeling orrepairing public housing) if sufficient private sector employment isn't available, or (2) community service program activities.

Community property. If you are married, but qualify tofile as head of household under special rules for marriedtaxpayers living apart (see Rule 3), and live in a state thathas community property laws, your earned income for theEIC doesn't include any amount earned by your spousethat is treated as belonging to you under those laws. Thatamount isn't earned income for the EIC, even though youmust include it in your gross income on your income taxreturn. Your earned income includes the entire amountyou earned, even if part of it is treated as belonging toyour spouse under your state's community property laws.

Nevada, Washington, and California domestic partners. If you are a registered domestic partner in Nevada, Washington, or California, the same rules apply.Your earned income for the EIC doesn't include anyamount earned by your partner. Your earned income includes the entire amount you earned. For details, see Publication 555.

Conservation Reserve Program (CRP) payments. Ifyou were receiving social security retirement benefits orsocial security disability benefits at the time you receivedany CRP payments, your CRP payments aren't earned income for the EIC.

Nontaxable military pay. Nontaxable pay for membersof the Armed Forces isn't considered earned income forthe EIC. Examples of nontaxable military pay are combatpay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). See Pub. 3, ArmedForces' Tax Guide, for more information.

TIP: Combat pay. You can elect to include your nontaxable combat pay in earned income for the EIC. See Nontaxable combat pay in chapter 4.