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Tax-free income and the EIC
Q
We have a client who has a tax-free bond, therefore the dividends are not reported on his tax return. However, he qualifies for the Earned Income Credit and the amount of dividends would put him over the threshold. Does he still not have to report the dividends in this case?
A
James A. Klotz responds:
Tax-free income is never includable in an individual’s federal taxable income. However, the amount of tax-free income is includable in many computations required by the IRS. These computations include, but are not limited to, the computation of investment income which must be made in order to determine an individual’s or family’s eligibility for the Earned Income Credit (EIC). Total investment income, as defined for EIC eligibility, must be less than $2,700 in order to qualify for the EIC. Please refer to IRS publication 596 (Earned Income Credit) for further details.
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