How to report earnings while incarcerated

[Greta]

Client earned money while incarcerated in 2021. Will he receive a tax slip? He was released mid-2021, and has some earnings since. Eligible for EIC. Can I also request the $1400 Recovery Credit?

[sjrcpa]

You report income earned while in jail the same as income earned if not in jail.

[Greta]

Client likely will not get a W-2 or a 1099. The pay he received was net after food & rent were deducted. And it's not eligible for EIC. The numbers are small, so I'll try to come close. Not sure whether he is eligible for the stimulus payments. I was glad to hear he was forced to get a vaccine.

[Terry53029 · Accepted solution]

Being  incarcerated in 2021 does not affect eligibility for stimulus 

[sjrcpa]

Pay for what? Why wouldn't it be earned income?

Report Gross.

Somewhere along the line IRS said convicts can't get EIP. Don't know whether they made it up or if it's in the statute so you'll need to look that up. EDIT: Or listen to Terry.

[Greta]

I looked it up. Terry was right.

My client didn't keep his paystubs as to what he earned. No 1099 or W-2 will be issued. We'll guess at the gross, since income tax will be zero anyway. Social security tax? Likely will not go into his kitty. This is a first for me after 4 decades.

[TaxGuyBill]

---

@sjrcpa wrote:

Why wouldn't it be earned income?

---

It is not earned income for purposes of EIC.  ProSeries has a EIC worksheet to enter it or back it out.

Earnings while an inmate.

Amounts received for work performed while an inmate in a penal institution aren't earned income when figuring the earned income credit. This includes amounts for work performed while in a work release program or while in a halfway house.

https://www.irs.gov/publications/p596#en_US_2020_publink1000297688

[Greta]

That's helpful. But do I put it on Sch C? There is no W-2 and no social security taxes withheld. In 2021 the EIC will look back to 2019 and ignore 2021 income.

[sjrcpa]

Thanks @TaxGuyBill . I didn't know that. I've never prepared a return for someone in that situation.

[TaxGuyBill]

It goes on Line 1 of the 1040.

1. Go to the 1040Wks. 
2. Double-click the space just above the dotted line for line 1.
3. Enter the amount on Line 9b.
4. Go to the EIC Worksheet.  On the Smart Worksheet between lines 2 and 3, enter the prison income to back it out of EIC.

[qbteachmt]

I had a bit of trouble, but finally found a short article/podcast segment not behind a paywall that covers the issues for inmates and all 3 of the EIP distributions, including garnishment issues, debit card mishandling, etc. It includes reference to the class action lawsuit that released funds to inmates, but when I click it, it is considered a suspicious external link. Here's the main article:

https://www.nwnewsnetwork.org/government-and-politics/2021-03-02/prisoners-eligible-for-stimulus-che...

On last night's national news, there was a piece on the Boston Marathon bomber getting the money and using it for gifts to family, when there also is a cry for restitution payments to his victims.