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Posted by Ernie Klein on March 31, 2008, 8:24 pm
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> Taxpayer had no income during 2007 except non-taxable disability pay and
> $12,000 sick pay.
>
> Taxpayer received a W2 with $12,000 in box 1 and "Third Party Sick Pay"
> checked in box 13.
>
> Does the $12K sick pay count as earned income toward EIC?
>
> TurboTax sure thinks it does, even with box 13 checked, TT calculates a
> $4,700 refund (HOH), even though taxpayer paid and owed no tax for 2007.
> I can't find anything in the Pubs that speak to sick pay counting (or
> not counting) toward EIC. Taxpayer could sure use the extra $4.7K if
> this is correct.
Well, I called the IRS today (twice) to try to get an answer, and as
could be predicted I received two opposing answers.
On my first call (after putting me on hold for 10 minutes) the person
wanted to know if the employee or employer paid for the sick pay policy.
I said I didn't know but I thought that it was the employer. He said
that, in that case, as long as the sick pay was taxable, then it was
indeed to be counted as earned income when computing the EIC.
I later learned that the sick pay is actually a UNION benefit, so I
called the IRS again. This time, even before I got to the point of it
being a union benefit I was told that sick pay is never counted as
earned income for calculating EIC.
I pointed out that on my earlier call I received a different answer.
She put me on hold. When she came back she said her supervisor agreed
with her answer that is was not earned income.
Having done a bit more research before I called the second time, I
asked, then where and how do I exclude it from EIC, when the 1040
instructions for EIC says to use the amount from line 7 (which by
definition has to include ALL W2 taxable income) and then subtract 1)
Taxable Scholarship or grant, 2) Amount received while an inmate, or 3)
Amount received as a pension... Those are the only choices - so where
and how can I subtract the third party sick pay.
We also discussed Pub 596 which says earned income includes "Wages,
salaries, tips, and other taxable employee pay. Employee pay is earned
income only if it is taxable." If sick pay is to replace wages and is
taxable, then why isn't it included in "other taxable employee pay" ?
Pub 596 also has a section that says what IS NOT earned income, and none
of the exclusions would seem to cover sick pay.
She said, "Good points", and put me back on hold. When she came back,
she said she would take my name and address and mail (or email) me an
answer in 7-14 days from the "experts".
So I am still waiting for a definitive answer.
--
-Ernie-
--
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Posted by Stuart Bronstein on March 31, 2008, 8:42 pm
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> I later learned that the sick pay is actually a UNION benefit, so
> I called the IRS again. This time, even before I got to the point
> of it being a union benefit I was told that sick pay is never
> counted as earned income for calculating EIC.
I was able to find one only tax court case that deals with the issue of
sick pay and earned income, though not in the context of the earned
income credit. In that case, Woodford v. Commissioner 71 T.C. 991
(1979), the court held that sick pay is earned income unless
specifically excluded by law.
Sick pay is specifically determined to be earned income for withholding
purposes under IRC §3402(o). I found no regulation dealing with the
issue.
It seems to me that sick leave is more in the nature of payment for
lost wages rather than payment for personal injuries, so I'd guess it
should be included in earned income. But the law is not clear and I
was able to find nothing authoritative either way (I didn't look
through IRS publications or rulings). So you might be justified in
taking either position.
Stu
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by Ernie Klein on April 1, 2008, 12:08 am
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>
> > I later learned that the sick pay is actually a UNION benefit, so
> > I called the IRS again. This time, even before I got to the point
> > of it being a union benefit I was told that sick pay is never
> > counted as earned income for calculating EIC.
> I was able to find one only tax court case that deals with the issue of
> sick pay and earned income, though not in the context of the earned
> income credit. In that case, Woodford v. Commissioner 71 T.C. 991
> (1979), the court held that sick pay is earned income unless
> specifically excluded by law.
>
> Sick pay is specifically determined to be earned income for withholding
> purposes under IRC §3402(o). I found no regulation dealing with the
> issue.
>
That's good information, thanks.
> It seems to me that sick leave is more in the nature of payment for
> lost wages rather than payment for personal injuries, so I'd guess it
> should be included in earned income. But the law is not clear and I
> was able to find nothing authoritative either way (I didn't look
> through IRS publications or rulings). So you might be justified in
> taking either position.
I am not sure that sick leave is the same at third party sick pay. When
I think of sick leave I think of an employer who gives sick days as a
benefit that can be accumulated. When an employee is sick their pay
continues as they use up their sick days but it is not accounted for in
any special way on the employees w2 form - it is only an employer
accounting.
Third party sick pay is paid by an insurance company whose premiums are
paid as an employment benefit by the employer or in the case of the
taxpayer I am talking about, by the employees union as a union benefit.
Perhaps the best way to handle this is not to apply for the EIC at all
but simply ask the IRS to figure the EIC by paper filing and writing
"EIC" on the dotted line next to line 66a per the 1040 instructions.
That would put the onus on the IRS rather than the taxpayer to figure
the correct EIC and do the right thing. (My guess is that the tax
software the IRS uses to figure this would count this as earned income
just like all the other tax programs do and the taxpayer would get the
EIC credit without anyone giving it a second thought.) That way, if the
taxpayer is ever audited and higher-ups say, on no, that is not allowed,
the taxpayer can say, "I didn't do it -you did".
--
-Ernie-
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Stuart Bronstein on April 1, 2008, 12:56 am
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> Third party sick pay is paid by an insurance company whose
> premiums are paid as an employment benefit by the employer or in
> the case of the taxpayer I am talking about, by the employees
> union as a union benefit.
Good point. I hadn't considered that.
> Perhaps the best way to handle this is not to apply for the EIC at
> all but simply ask the IRS to figure the EIC by paper filing and
> writing "EIC" on the dotted line next to line 66a per the 1040
> instructions. That would put the onus on the IRS rather than the
> taxpayer to figure the correct EIC and do the right thing. (My
> guess is that the tax software the IRS uses to figure this would
> count this as earned income just like all the other tax programs
> do and the taxpayer would get the EIC credit without anyone giving
> it a second thought.) That way, if the taxpayer is ever audited
> and higher-ups say, on no, that is not allowed, the taxpayer can
> say, "I didn't do it -you did".
Another good idea, but perhaps not foolproof. I met someone years ago
who was in the army out of the country when he had to file his tax
return. He said that he did the best he could, then checked the box to
have the IRS figure the amount of his taxes, which they did. But then
they came back to him a year or two later, saying they made a mistake,
and wanted interest and penalties!
Stu
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by removeps-groups@yahoo.com on April 4, 2008, 1:35 pm
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> Another good idea, but perhaps not foolproof. I met someone years ago
> who was in the army out of the country when he had to file his tax
> return. He said that he did the best he could, then checked the box to
> have the IRS figure the amount of his taxes, which they did. But then
> they came back to him a year or two later, saying they made a mistake,
> and wanted interest and penalties!
To make matters worse, if the IRS computes the return, the statute of
limitations never ends. What is the penalty for filing an incorrect
EIC, a fraudulent EIC? I know that if your file a false EIC then you
are disbarred from the EIC credit for 10 years. Does the penalty
apply when the IRS computes it -- seems it should not unless you give
them misleading information. I think if you disclose that you want
them to compute the EIC but attach a letter to your return saying that
you are not sure if the the piece of income qualifies for the EIC,
then there certainly should be no penalties and interest, but one
never knows when dealing with governments.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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