How to fix K-1 partnership income not being recognized as earned income for tax credits

Thanks for explaining! Is there any way around this? Could I pay myself a small salary from the partnership instead so that it would count as earned income? Or is there another type of business structure that would work better for my situation?

You've got the right idea! You could potentially pay yourself as an employee of the partnership and receive a W-2, which would count as earned income. However, this comes with additional payroll tax requirements and administrative costs that might not be worth it for a minimal amount. Another option would be to consider changing your business structure to a sole proprietorship (if you're the only active partner) and report income on Schedule C, which would count as earned income for tax credit purposes. This change doesn't make sense for all situations though, as partnerships have other benefits depending on your specific business circumstances.

How does that work exactly? Does it just give general advice or does it actually tell you what to do specifically for your situation? I'm in a similar boat with a partnership and marketplace insurance.

Sounds interesting but I'm skeptical about these tax tools. Did it actually help you get more credits or was it just explaining stuff you could find on the IRS website? I've wasted money on tax tools before that just regurgitate public info.

It actually analyzes your specific documents and situations, not just general advice. When I uploaded my K-1 and 1095-A, it identified my specific issue with the partnership income classification and gave me personalized recommendations based on my income levels and business structure. Regarding your skepticism, what made it different was that it connected the dots between different parts of my tax situation that I didn't realize were related. For example, it showed me how restructuring part of my income could qualify me for the EIC while still maintaining the partnership for other business reasons. It wasn't just explaining IRS terms - it was showing me specific actions for my situation that I hadn't found elsewhere.

Wait, how does this actually work? I've been trying to call the IRS for over a month about a similar issue. Does this service just keep dialing for you or something?

Yeah right. Nothing can get you through to the IRS faster. That sounds like a scam to me. The IRS phone system is deliberately designed to be impenetrable. I've literally never gotten through no matter what time or day I call.

It uses a system that navigates the IRS phone tree and holds your place in line so you don't have to stay on the phone. When an agent is about to pick up, you get a call connecting you directly to them. It's not that it magically creates a special line or anything - it just handles the terrible waiting process for you. The service absolutely works. I was also extremely skeptical, which is why I mentioned that in my post. I had tried calling at 7am, at 4pm, Tuesdays, Fridays - every "trick" I read online. But I literally spoke to an agent within 3 hours of using Claimyr, after weeks of failing on my own. The IRS systems are overloaded but not impossible to get through - it's just a numbers game that this service helps with.

Thank you so much for this tip! I've never heard of guaranteed payments before. Do I need to amend the partnership agreement with my partner to add this in? And does this have to be done before the tax year or can we still do it for last year?

Yes, you would need to amend your partnership agreement to specifically include these guaranteed payments. Ideally, this should be done before or during the tax year, not after the fact. The IRS might scrutinize arrangements that appear to be created retroactively just to claim tax benefits. For the current tax year, you can definitely implement this strategy going forward. Your operating agreement should specify the guaranteed payment amount or formula, and these payments should be made regularly throughout the year just like you would pay a salary. Keep good documentation of partner services that justify these payments, as that helps if there's ever an audit question.

You're right about that distinction. For Form 8962 (Premium Tax Credit), you use your Modified Adjusted Gross Income (MAGI), which DOES include your partnership income from the K-1. This is different from the Earned Income Credit which only counts W-2 wages and self-employment income. So for marketplace subsidies, your partnership income absolutely counts toward your income threshold. This is probably why the original poster is required to file - because of the 1095-A and potential reconciliation of advance premium tax credits, even though they might not qualify for EITC with that same income.

Thanks for clarifying that! So I need to include all my partnership K-1 income for calculating my premium tax credit, but that same income doesn't help me qualify for earned income credit. Man, tax rules are so frustrating sometimes. I wish they were more consistent across different parts of the tax code.

That's really helpful to know! I'll definitely look into the Additional Child Tax Credit. Do you happen to know what the income thresholds are for that? And is that something I could still qualify for even with my K-1 partnership income situation?

The Additional Child Tax Credit doesn't have a minimum income requirement like some others. You can claim it if you have at least $2,500 in earned income, and your K-1 income generally wouldn't count toward this threshold. However, if you implement some of the suggestions others mentioned (like guaranteed payments), that portion would count as earned income and could help you qualify. For tax year 2025, the max refundable amount is up to $1,600 per qualifying child under 17. It phases in at 15% of your earned income over $2,500, so the more earned income you have (up to the threshold), the more credit you can get. Definitely worth exploring with your specific numbers!

This is such great advice! I'm definitely going to look into the guaranteed payments option - it sounds like that could be a game changer for my situation. You're right that I do perform actual services for the partnership (bookkeeping, client communications, etc.) so it makes sense that I should be getting paid for that work specifically. The dependency/1095-A situation is really complex too. My fiancé and I aren't married yet, so we filed separately, but since we're both on the marketplace plan, it's created this weird situation where neither of us can optimize our tax benefits properly. I think getting a second opinion from someone who really understands these partnership + marketplace insurance combinations is definitely my next step. Thanks for pointing out that not all tax preparers are familiar with these specific scenarios - that might explain why my previous tax professional just told me not to file rather than exploring other options!

This is exactly the kind of detailed advice I was hoping to find! The guaranteed payments approach seems to be the consistent recommendation across multiple responses here. I'm curious about the documentation aspect you mentioned - do you keep a formal log of hours and tasks, or is it more informal record-keeping? Also, when you say "restructuring part of your partnership income" - does this mean you reduced your regular partnership distributions and replaced some of that with guaranteed payments instead? I want to make sure I understand the mechanics of how this works before I talk to my partner about potentially changing our agreement. The point about finding a tax professional experienced with both partnerships AND marketplace insurance is really important. I think that's been part of my problem - my previous preparer clearly didn't have experience with this specific combination of issues.