Individuals who receive income from a pension, IRA plan, or 401k plan during the tax year are issued a Form 1099-R. Financial institutions use this form to report retirement distributions they issue to employees and retired individuals. The income on a Form 1099-R may be subject to federal income tax, depending on the type of transaction. Since the earned income credit is limited to individuals who have an adjusted gross income under a certain amount, unearned income from a Form 1099-R may affect eligibility for the earned income credit (EIC).
Form 1099-R is used to report the total amount of retirement distributions an employee or retiree receives during the tax year. Taxpayers who receive regular pension distributions, employees who roll over the funds in a retirement account to another account and those who make an early withdrawal of their funds will all receive Form 1099-R.
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The income on a Form 1099-R may be subject to federal income tax, depending on the type of transaction.
Earned Income Credit
The EIC is a refundable tax credit given to low-income taxpayers. Those who have children in the home can receive a larger amount that those who do not. The credit is reduced as the amount of earned income increases. In 2010, a married taxpayer with three children could qualify for up to $5,666 in earned income credit. However, those who had an adjusted gross income that exceeded $48,362 were not eligible for the credit.
Tax Treatment of Form 1099-R Income
Depending on the type of transaction, a taxpayer may have to pay income tax on income from a Form 1099-R. Regular pension distributions and IRA plan payments are generally subject to federal income tax, particularly if the original contributions to the plans were tax-deductible. Direct rollovers are not subject to federal income tax. Box 2 of Form 1099-R reports the taxable amount of each transaction.
Impact of Form 1099-R Income on the Earned Income Credit
Since income on Form 1099-R is unearned income, it does not count as earned income for the purposes of figuring the amount of the EIC. However, if the income on Form 1099-R is taxable, it may increase a taxpayer's adjusted gross income, which could reduce the amount of EIC he is eligible to receive. For example, in 2010 a single taxpayer with an earned income of $25,000 and two children could qualify for up to $3,230 in EIC, based on his earned income and qualifying children. However, if that taxpayer received a lump-sum pension distribution of $20,000, his adjusted gross income would be too high to qualify for the credit.