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TouboTax question: For earned income credit, your investment…

TouboTax question: For earned income credit...
TouboTax question:
For earned income credit, your investment income must be $3400 or less, and the income limit is $39296. I only had $17 of investment income in 2016. But TurboTax told me that I'm not eligible for EIC because I had too much investment income???
The possible reasons: 1) I had converted $49k of traditional IRA to Roth, but it is not investment income; 2) I had entered wrong investment info earlier, but once I found it, I deleted the info.
How can I get the things straighten up? Or if I'm simply not eligible for EIC? If I'm eligible of course I want to get it. Please let me know how on TurboTax.
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Answered in 14 minutes by:
4/2/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,342
Experience: Taxes, Immigration, Labor Relations
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That should not be an issue.

Pension income is NOT included into investment income.

Please see page 6

https://www.irs.gov/pub/irs-pdf/p596.pdf

Worksheet 1. Investment Income If You Are Filing Form 1040

You may want to locate that worksheet in your tax preparation software and verify.

HOWEVER

because of that distribution - your adjusted gross income increased above $39296

and that disqualifies form EIC.

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Customer reply replied 10 months ago
That means, I'm not eligible was not because of my investment income was too high, but because of the AGI derived from my conversion of IRA? I read the Publication from your link, the income limit is for "Earned Income". Does conversion of traditional IRA to Roth IRA count as "earned income"?
I have not contributed to my 2016 IRA yet because I have a very limited amount of self-employed business income, I maybe able to contribute a portion of the allowed full amount. If the conversion of IRA can be counted as earned income, does that mean that I can contribute full amount for 2016 IRA?

I'm not eligible was not because of my investment income was too high, but because of the AGI derived from my conversion of IRA?

Correct - based on your information your AGI went above the limit - and that disqualifies you from EIC.

I read the Publication from your link, the income limit is for "Earned Income"

Indeed...

page 4

Rule 1—Adjusted Gross Income (AGI) Limits

So that is not earned income limit - but adjusted gross income limit.

Does conversion of traditional IRA to Roth IRA count as "earned income"?

No - that is NOT "earned income" but that is your taxable income and it is included into your AGI.

.

If you depend on EIC this year - I might suggest to re-characterize your Roth IRA conversion.

You still have time for that.

While generally I agree with your intention to convert traditional IRA to Roth IRA - that might be not good time for that transaction if you are eligible for EIC.

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Customer reply replied 10 months ago
Just went through the Earned Income Credit Worksheet and found that my rental income is counted as investment income, it is over the limit. May I contribute my Roth IRA based on the rent income? If yes, then I can contribute the full amount of IRA for 2016?

Yes - rental income is considered as investment income for EIC purposes.

Rental is passive activity - means rental income is passive - not earned income.

You may make IRA contribution based on EARNED income - wages or self-employment,

but not based on rental income.

As you do have self-employment income - you are eligible to make IRA contribution.

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Customer reply replied 10 months ago
My business income was more than the contribution limit, but after the business expenses, the net business income is less. But I can still contribute up to the net business income amount to my Roth IRA, right?

For Roth IRA - the limit is based on AGI - adjusted gross income.

That is the amount on form 1040 line 37.

If your AGI is below the threshold - you are eligible to contribute to Roth IRA.

If your AGI is too high - you may contribute to the traditional IRA and after that - convert to Roth IRA

Your contribution is limited by your earned income or $5500 - whatever is less.

If you are above 50 - there is additional $1000 allowed as catch up contribution.

Lev
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Category: Tax
Satisfied Customers: 31,342
Experience: Taxes, Immigration, Labor Relations
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