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Don’t Let the Earned Income Tax Credit (EITC) Torpedo Your Disability Benefits

March 18, 2019

Information from Nash Disability Law Attorney Dan Rosen

If EITC sounds like one of those alphabet soup abbreviations created by the government, you’re not wrong. EITC stands for Earned Income Tax Credit and it is part of the U.S. tax code. In a moment we will tell you how it can affect you if you are drawing Social Security disability benefits. But first, let us explain what EITC is.

EITC is a refundable tax credit designed to help low to moderate income working individuals, couples, and especially families with children. Note that a key part of this description is “refundable tax credit,” meaning it can be a tax refund paid directly to you. It is one of the biggest tax credits around. The tax credit can range from about $500 to more than $6,000, depending on your marital status and the number of children you have.

However, the rules for qualifying and actually collecting the Earned Income Tax Credit are rather complicated. Here are some of the rules:

  1. Your spouse and any qualifying children must have Social Security numbers.
  2. You cannot use the “Married Filing Separately” status on your tax return.
  3. Your annual investment income cannot exceed $3,450.
  4. You must file a tax return to get the refund.
  5. There are upper-income limits. (The amount depends on filing status and number of children.)
  6. You must have at least $1 in “earned income” for the year, that is, salary, wages and/or tips. (Social Security disability benefits do not qualify as “earned income”.)

It is Rule #6 that can torpedo your Social Security disability benefits. An important concept related to disability payments is “Substantial Gainful Activity” (SGA). The Social Security Administration says that if you are engaged in work (even part-time work) that results in “Substantial Gainful Activity” you are not disabled (with a few exceptions) and therefore are no longer eligible for disability benefits. For 2019, if you earn more than $1,220 per month (or $2,040 if you are blind) you will be considered engaged in “Substantial Gainful Activity.”

On occasion, we have clients who have, unbeknownst to them, have earned over the SGA limit. What they tell us is that maybe they earned some money by doing “a little babysitting,” or doing “a little hairstyling on the side.” Then, an overzealous tax advisor writes down an income number for EITC purposes, and this reported income is in excess of the SGA. The Internal Revenue Service and the Social Security Administration talk to each other, causing significant problems for a disability case.

It is possible that a disabled person could be the victim of identity theft where a criminal has filed a tax return to collect the EITC using that person’s Social Security number. If a person believes they have been the victim of identity theft, there is a process (which is a bit tricky) to correct their Social Security records. However, in our experience identity theft is rare and, more often than not, identity theft claims do not hold up.

The bottom line is this: Work is work. It doesn’t matter if it’s babysitting for a relative, dyeing your neighbor’s hair or working part-time in the “gig” economy. If you are getting paid while you are drawing disability benefits, the SGA limits apply to you. The lesson: be honest. If you only earned $500 in a year, that may not have much of an effect on your disability case. But if your tax advisor writes that you earned $15,000 in order to “get you a refund,” it may prevent you from receiving your disability benefits at all.

Please note this discussion of the EITC should be regarded as general income tax guidance, but should not be used as tax advice in individual cases. You should always seek tax advice from a competent tax professional. And if you need advice about your Social Security disability claim, contact us at Nash Disability Law for a free evaluation of your situation.