Disability as Earned Income?

[Possi]

My client married a woman who is permanently disabled from a tumor on her spine. She received Social Security (22,800) and she receives a W2 from an insurance company with ONLY box 1 filled in, $12,922, and "third party sick pay" marked. 

She hasn't filed a tax return since her disability initiated in 2005, when she was 41 years old. 

Wife is telling husband that she isn't required to file and she knows it all. I told the husband, congratulations on your wedding. She is required to file. 

If she had filed in the past, I believe she would have received a little EIC because what I have read tells me that her disability insurance W2 would count as "earned income." 

Do you agree? 

 

[jklcpa]

Yes, the payer of the third party sick pay is acting as agent for the employer and the payment is considered wages to the extent it is subject to withholding and includable in income, so it does qualify as earned income for EIC.

[Possi]

Thank you for the validation. That's one I got right. One. 

[TAXMAN]

I think the ones you gotta watch are the 1099R with a code 3.

[Possi]

The state of VA doesn't tax permanent disability reported as wages. I had to override TWise to get it to work, and I hate doing that. We are mostly ATX here, but if there are any other red-headed-step-children who might have a clue, help a mother, ok? 

[Hahn1040]

Possi,  it is a subtraction to income on line 5 of the adjustments

on the 1099R input use code 3 (it is 3 on your 1099R isn't it?)  then there is a box on the 1099R input just under the box 7 that says "check if disability and the taxpayer is disabled"

it will them put it on line 7 as wages and subtract out a max of $20,000 on line 5 of the adjustments