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1099-R with distribution code 3. Can I get an earned income credit?

If someone receives a 1099-R...

If someone receives a 1099-R with a distribution code 3, can they qualify for earned income credit? The person receives his pension because he became disabled.

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Answered in 17 minutes by:
2/7/2011
JKCPA
JKCPA, CPA
Category: Tax
Satisfied Customers: 5,884
Experience: CPA with tax experience.
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Unfortunately the amount from a Form 1099-R is not considered "earned income" for purposes of the earned income credit. Earned income is wage income from a Form W-2 or self-employment income from a business. If the individual also has earned income, they may qualify for the earned income credit if they meet all the other criteria for earned income credit.

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Customer reply replied 7 years ago
This is what I thought. My tax customer went to H&R Block and their systems puts it through as earned income because of the Code "3". I tried their web-site to see if it was the preparer or the software. It is the software. I just put the same thing through on TurboTax and their software does the same thing and gives them earned income credit on it. I am inputting as a 1099-R and using the code 3. I do not understand how both softwares would have this same kind of flaw. My Drake Software does not process it this way. I have to go to 2 special boxes and attach an explanation to get it to calculate the EITC.

After I reviewed, IRS Pub. 596 pages 10-11, it indicates the disability payments may be earned income. It states "If you retired on disability, taxable benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age. Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled. You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age."

So if this is this type of disability and it is reported on line 7 as wages, then it can be considered earned income. It looks like H&R and Turbotax may be correct. Is your Drake software including it on line 7?

JKCPA
JKCPA, CPA
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Customer reply replied 7 years ago
It will if I mark a special box for this and also attach an explanation page. Thanks for your help! I feel better knowing I can correct myself and help this customer.
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