IRS didn't allow Medicaid waiver for EIC

[rodrigo]

My client just received a letter stating that they had changed the return because they didn't allow the amount claimed as Earned Income credit because their earned income or adjusted gross income is more than the amount allowed to qualify for the credit. 

My client W-2 had $0 in box 1 and Code II with $61881.57 in box 12 and that amount went to the 1040 box 1d and also as negative in box 8 (as non-taxable Medicaid payment). They also had other income for $53,321

I sent them to their local IRS office and their solution (after half day spent there) was to file a 1040-X and remove both entries. Pretty much ignore the W-2.

Has anyone had this issue before?

Thank you

[Just-Lisa-Now-]

So 61881 in earned income and 53321 in other income, I dont see how that would qualify for EITC.

[rodrigo]

Since the 61,881 is not taxable still counts for the EITC?

[Just-Lisa-Now-]

You have the option of including it for EITC calculations.

What was the 53k in other income?

Were you trying to exclude the 61k so that the 53k qualified them for EITC?

[rodrigo]

Yes. I set the 61k to be excluded.

I forgot to mention more details:

MFJ with 2 children that qualify for EIC.

The 53k are taxpayer income.
The 61k are the in-home support that wife receives to care for one of the children (child has a disability)

[Just-Lisa-Now- · Accepted solution]

@TaxGuyBill  You know how this works better than I do, I dont have any clients with Medicaid Waiver income that also qualify for EITC.  I dont even bother to enter a W2 with a zero in Box 1.

I know you can choose to include it it qualifies you for EITC, does it work against you if your other income qualifies you for EITC?

[rodrigo]

Thanks for your help. I used to not enter the w-2 but since they changed and has the total in box 12 I though it makes sense to do it. I guess i was wrong.

I had clients when I made sense to include but now the case here.

Anyway, I will just remove the whole thing and see what they say about it.

Thanks!