Understanding the interplay between unemployment benefits and Adjusted Gross Income (AGI) is crucial for individuals seeking to claim the Earned Income Credit (EIC). This comprehensive guide analyzes the impact of unemployment compensation on AGI and EIC eligibility, providing valuable insights for taxpayers.
Unemployment Compensation and AGI
The Internal Revenue Service (IRS) defines AGI as the total income subject to income tax, minus certain deductions referred to as “adjustments to income.” Unemployment compensation received from the state is specifically excluded from the definition of “earned income” but is included in the calculation of AGI.
Impact on EIC Eligibility
To qualify for the EIC, taxpayers must meet specific income requirements. The maximum AGI for EIC eligibility varies based on filing status and the number of qualifying children. The inclusion of unemployment compensation in AGI can affect EIC eligibility, particularly for individuals with higher unemployment benefits.
AGI Thresholds for EIC
The following table outlines the AGI thresholds for EIC eligibility for tax year 2023:
| Filing Status | No Qualifying Children | One Qualifying Child | Two Qualifying Children | Three or More Qualifying Children |
|---|---|---|---|---|
| Single | $16,480 | $43,430 | $49,190 | $54,890 |
| Married Filing Jointly | $27,380 | $54,330 | $60,090 | $65,850 |
| Married Filing Separately (must live apart from spouse for the entire year) | $13,690 | $27,170 | $32,930 | $38,690 |
| Head of Household | $20,800 | $47,830 | $53,590 | $59,350 |
Example
Consider an individual who files as single with no qualifying children and receives $15,000 in unemployment compensation. Their AGI would be $15,000, which falls below the AGI threshold of $16,480 for EIC eligibility. Therefore, the individual would be eligible to claim the EIC.
Additional Considerations
- Investment Income: Investment income, such as interest and dividends, is also included in AGI. High investment income can reduce EIC eligibility.
- Citizenship or Residency: Nonresident aliens are generally not eligible for the EIC.
- Earned Income Requirement: To qualify for the EIC, taxpayers must have earned income, such as wages, self-employment income, or unemployment compensation.
Understanding the impact of unemployment compensation on AGI is essential for determining EIC eligibility. By carefully considering the AGI thresholds and other eligibility requirements, taxpayers can maximize their tax benefits and ensure they receive the credits they are entitled to.
Adjusted Gross Income, Explained in Four Minutes | WSJ
FAQ
Does your AGI include unemployment?
Does the IRS consider unemployment earned income?
Is unemployment compensation included in federal gross income?
What income is included in AGI?
Almost all forms of income – except municipal bond interest – are factored into the AGI. There is also a long list of exclusions to the AGI. Those are items that can be deducted to lower a person’s adjusted gross income. Both income and exclusions are spelled out on the Schedule 1 tax form. Why Is AGI Important?
How is AGI calculated?
The AGI is calculated in the following way: Wages, salaries, tips + other income = gross income – adjustments to income = AGI “The changes are generally going to be made on the Schedule 1 ,” Renn says. For 2021, there were 25 categories of additional income that must be added when calculating gross income. They include the following, among others:
What if my income is below the AGI threshold?
It’s possible for your earned income to be below the threshold but for your total income, and therefore your AGI, to be above the threshold because of the addition of unemployment compensation. This could make you ineligible for the Earned Income Credit. To find the AGI thresholds for your specific situation, see: IRS Publication 596 .
What types of income does not count toward my AGI?
Some types of income are not taxed. The following sources of income do not count toward your AGI: Life insurance proceeds (unless the policy was turned over to you for a price) Money rolled over from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)