EIC for the Rich?

[BHoffman]

Wondering if this family really qualifies for EIC. New client. I prepare returns for his sister and his cousin, and have for years. They are very honest.

I've done all of the due diligence. Drake has a bunch of forms to help, and I pursued them with questions, document requests, etc. They answered every question, provided every document, signed every form I put in front of them.

I do not like to prepare EIC returns. Too much risk. This is the only one this year that might qualify.

They had stock sales in 2009. The proceeds were over $90k. Capital loss of over $3k.

Is it really possible that this family, who received over $90k in cash due to stock sales, is eligible for EIC?

Thanks for any advice.

[dyne]

You can BLOCK the EIC. I believe I would do just that!

[erchess]

Go by the law

If they qualify for EIC under the letter of the law then you ought to give it to them or if you don't want to do that tell them to go elsewhere.

I believe that NEI for EIC purposes does allow for stock losses to erase other investment income.

[taxea]

What is their AGI and how many dependents do they have that qualify?

[BHoffman]

AGI - $27k, two kids.

He is the sole shareholder of his SCorp. Does that count as being "self-employed"? He has pass thru SCorp income of around $7k on line 17. Does that count as investment income?

I'm with erchess on this one. If they qualify to the letter of the law, then I think they get the EIC. Having a very hard time finding information related to SCorps and EIC, whether it counts as Self Employment and whether the pass through income counts as investment income or not.

Thanks for replies.

[RitaB]

If they qualify, I would allow the credit

I would allow the credit if the $7000 is not investment income, and it may very well be. I'll try to look in on that.

I see so many people getting refundable credits, and I know (OK, suspect) they are dishonest, I'd be happy to see somebody that PAID taxes get a break. And, instead of buying crap they didn't need, maybe these folks have socked away money so they don't have to depend on Medicare/Aid for health care. I will admit I am a little resentful cause S-Corp shareholders often get to avoid SS/MC taxes on earned income, so I am not as jazzed as I was earlier. But still...

See? Right there goes one of my clients in his $40,000 pickup. And, his live-in GF is right behind him with the top down on her car. They dropped their four kids off at public school and are headed to Shoney's for breakfast while I am working. Then they will catch "Family Guy" on their 56" flat screen TV they just bought with their refund.

Sorry, I got carried away there.

[BHoffman]

I hear you. I don't write the tax code. If this client wants EIC and qualifies for it, then that's the way it goes. If I think it's tax money wasted on someone not in dire straits, then that's my opinion but not my choice.

[RitaB]

I think they qualify

I have looked (briefly, I admit) at Pub 596, Sch E Instructions, and Form 8582 Instructions. My opinion is that this is not a passive activity, so the $7000 is not investment income. Just earnings that escape SS/MC tax.

I have seen ministers making good money and filing Form 4361 get EIC, too.

At least your client's income was actually within the EIC range for the year and not just ignored for purposes of EIC.

[BHoffman]

Found this on IRS website, but it is not substantive authority:

"Who Is Considered Self-Employed?

Self-Employed

You are self-employed if either of the following applies to you:

You carry on a trade or business as a sole proprietor; or
You are a member of a partnership or limited liability company that files a Form 1065, U.S. Return of Partnership, that carries on a trade or business."

This gives me reason to believe LLCs that file form 1120S are not considered self-employed by the IRS. I cannot find where the IRS considers SCorp shareholders to be self-employed for EIC purposes, and I am looking.

[RitaB]

Yeah, but

This gives me reason to believe LLCs that file form 1120S are not considered self-employed by the IRS. I cannot find where the IRS considers SCorp shareholders to be self-employed for EIC purposes, and I am looking.

Yeah, but other folks have income that is NOT self-employment (as in employees) and they qualify for EIC, so I don't think that is relevant. The question of whether the $7000 is investment income is the important one. Look at Pub 596 at the worksheet to figure investment income. Then in Instructions to Form 8582, you find the income is not passive.

Edit: As I think about this further, you may be trying to determine if the $7000 gets added to figure EIC. That IS a good question. I would assume "yes" but I will look, too.

[snowshine]

TTB 11-9 under "Investment Income Limit" reads: Other Schedule E income. I take this to knock out your client from the EIC.

[Burke]

AGI - $27k, two kids.

He is the sole shareholder of his SCorp. Does that count as being "self-employed"? He has pass thru SCorp income of around $7k on line 17. Does that count as investment income?
I'm with erchess on this one. If they qualify to the letter of the law, then I think they get the EIC. Having a very hard time finding information related to SCorps and EIC, whether it counts as Self Employment and whether the pass through income counts as investment income or not.Thanks for replies.

The pass-through income from SCorp is not investment income in this circumstance However, if some of it was treated as earnings, it would change the EIC, but not AGI. I had the same misgivings on one earlier this year -- no Sub S corp -- but still, family lives in a $250K house that is paid for. Just low income, no investment income. Sigh......

[RitaB]

Agree, it's not investment income

It is covered in IRC 32(i)(2). I only know that because of this:

http://www.taxalmanac.org/index.php/Discussion:INCOME_FROM_S_CORP_FOR_EIC_PURPOSE

Riley2 (and Burke) are sharp folks.



Now, we need to prove that the $7000 counts toward the EIC. Surely it does, I am looking.

[Snaggletoof]

Bad Years

I've known people that are quite successful, and perfunctorily honest that occasionally simply have a bad year.

No reason why they shouldn't be as entitled to EIC as the rest of the EIC crowd. If they live in a million-dollar home, send kids to Harvard, and dapper with the country club, this doesn't mean they shouldn't take advantage of EIC if they have a bad year.

[ChEAr$]

Found this on IRS website, but it is not substantive authority:

"Who Is Considered Self-Employed?

Self-Employed

You are self-employed if either of the following applies to you:

You carry on a trade or business as a sole proprietor; or
You are a member of a partnership or limited liability company that files a Form 1065, U.S. Return of Partnership, that carries on a trade or business."

This gives me reason to believe LLCs that file form 1120S are not considered self-employed by the IRS. I cannot find where the IRS considers SCorp shareholders to be self-employed for EIC purposes, and I am looking.

Right, of course members of an LLC which files as an S corp are not self employed.
S corp stockholders/officers, etc never have been considered self employed by IRS.
I remember looking that up way long time ago in 1980.