Earned income

[oceanlovin'ea]

I have a client who is retired but receives a K-1 for a partnership that he has. He and his family own a mobile home park and he does qualify for material participation.

He had no earned income from W-2's this year but my question is if the amount that is on his K-1 and coded material participation would be considered earned income.

They have custody of their granddaughter but did not use the child tax credit because they didn't have any taxable income or tax due. But additional child tax credit might be available if they had earned income.

Also for EIC purposes, he would need to have earned income.

But I couldn't find anything that told me if that income could be considered earned income.

Don't want to do anything that is wrong, but if they are entitled to the credits would like to make sure they get it.

Linda F

[Luis Mopeo]

I have a client who is retired but receives a K-1 for a partnership that he has. He and his family own a mobile home park and he does qualify for material participation.

He had no earned income from W-2's this year but my question is if the amount that is on his K-1 and coded material participation would be considered earned income.

They have custody of their granddaughter but did not use the child tax credit because they didn't have any taxable income or tax due. But additional child tax credit might be available if they had earned income.

Also for EIC purposes, he would need to have earned income.

But I couldn't find anything that told me if that income could be considered earned income.

Don't want to do anything that is wrong, but if they are entitled to the credits would like to make sure they get it.

Linda F

Any earned income would have to be from Schedule SE for a self-employed taxpayer. Was the K-1 income subject to self-employment tax?

[oceanlovin'ea]

No

I have never paid SE tax on that money. I hadn't thought of that as a way to determine earned income.

Linda F

[ChEAr$]

K-1

Well Linda, look at the K 1 again. Somewhere down there below the middle is a line
(forget the number right now) labeled "self employment income".

If he's a material participant, then there should be an amount on that line, and when
properly input in the program, should generate a schedule se.

How about it?

[Joe Btfsplk]

Sounds like passive income

Unless he materially participates, the K-1 income is passive income. He escapes self-employment tax, but it won't count to qualify for the Earned Income Credit. The earned income credit is supposed to encourage people to work, not reward them for passive activity income..

[Joe Btfsplk]

You said he materially participates

If he is an active participant in the operation, the self-employment income should be on line 14 of his K-1.

If it should be there, and isn't, then contact the person responsible for the K-1s.

If it is there, then he should report it on Schedule SE.

[oceanlovin'ea]

correction

Ok, I loooked at last years return just to make sure of my statements. The earned income credit he received last year was based on his wages as he was employed part of the year. Actually the K-1 comes from a S corp, not a partnership. He owns 25% interest in the mobile home park. It was inherited from his parents.

He is actively involved in running the park. I will have to make sure of the 500 hours, though. That is about 40 hours each month.

The way EIC is affected is that passive activity is considered investment income and the amount of income from the K-1 was over the limit if it is considered passive activity.

Well, with more reading, I think my questions probably come more from my program than from the K-1. So I will post a different question.

Thanks for all your responses.

Linda F

[Joe Btfsplk]

S corp

If it is an S corp he would get no self-employment income, but should receive a 'reasonable salary' if he materially participates.

No salary = no Earned income from the S Corp.

I don't believe you can have unlimited investment income or passive income and still get the EIC.. People like me and Warren Buffet don't qualify.

[Davc]

Also, a mobile home park may be a rental activity rather than a business depending on what services are provided to the tenants. Which would mean no earned income regardless of the level of participation.

[gkaiseril]

Rental income not part of Schedule C requires special worksheets, see page 46 Instructions for form 1040.

[Luis Mopeo]

I have never paid SE tax on that money. I hadn't thought of that as a way to determine earned income.

Linda F

If you look at the EIC worksheets, they ask for wages from line 7 of Form1040, plus self-employment income from Schedule SE. "Earned income," by definition for most things in the code means income subject to employment taxes.

As stated previously, the only earned income a shareholder will get out of an S corporation is from W2 wages.