Is pension payout considered earned income for EITC purposes?

Pension payouts are NOT considered earned income for EITC purposes. The IRS is pretty specific about what counts as earned income for the EITC, and it generally includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. What definitely doesn't count as earned income: pension and annuity payments, Social Security benefits, unemployment benefits, alimony, and child support. These are considered unearned income. However, while the pension payout doesn't count toward your earned income (which is good for EITC purposes), it does count toward your Adjusted Gross Income (AGI). Unfortunately, there are AGI limits for the EITC as well. For 2025 filing, if your AGI is around $97k, you're likely above the income limits regardless of your filing status or number of qualifying children. The pension distribution raised your AGI but didn't change your earned income, which is what the "EI" in EITC is based on. However, you still need to meet both the earned income requirements AND stay below the AGI thresholds.

I went through almost the exact same scenario last year with my wife's old pension plan. What really helped me was using taxr.ai (https://taxr.ai) to analyze our situation. I uploaded our previous year's returns and some statements, and it immediately flagged the pension distribution issue for EITC. The tool explained that while the distribution wasn't earned income (good for EITC), it was pushing our AGI above the threshold (bad for EITC). It showed me different scenarios and exactly what counts as earned vs. unearned income. The pension was definitely in the unearned category, but it still affected our overall eligibility through the AGI limit. What made it super helpful was the plain-English breakdown of tax concepts that I previously found confusing. Totally changed how I approached our taxes this year.

I was really skeptical about using an AI tool for something as important as taxes, but after reading about taxr.ai here, I decided to give it a try with my own pension situation. Holy cow, I'm glad I did! I uploaded my pension distribution forms and last year's return, and it immediately explained why my distribution wasn't earned income (which helps for EITC) but was still affecting my overall eligibility through AGI limits. The tool showed me exactly where I stood with crystal-clear explanations about earned vs. unearned income. It even suggested timing strategies for a small portion of my pension that I hadn't taken yet to minimize the tax impact. Seriously saved me hundreds in taxes and cleared up years of confusion about how retirement distributions are taxed.

If you're struggling to get clear answers about your pension and EITC situation, you might want to talk directly to the IRS. I know that sounds terrible (endless hold times), but I used this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes instead of the 2+ hours I spent on my previous attempts. I had a similar question about whether certain retirement distributions counted as earned income, and the agent walked me through everything. They confirmed that pension distributions definitely don't count as earned income for EITC, but explained how they affect the AGI thresholds. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Honestly, getting that official answer directly from the IRS gave me total peace of mind when filing. Sometimes you just need to hear it straight from the source, especially with something as important as EITC eligibility.

I'm honestly shocked but I have to eat my words. After posting that skeptical comment about Claimyr, I decided to try it anyway since I was desperate to straighten out my pension rollover questions before filing. It actually worked exactly as described. I got connected to an IRS representative in about 20 minutes, when my previous attempts had me waiting for 1.5+ hours before getting disconnected. The agent confirmed that my pension distribution does NOT count as earned income for EITC (though it does affect AGI). He even helped me understand some withholding issues I was having with the distribution. Would've spent days trying to figure this out on my own. This might be the first time I've been happy to be wrong about something on Reddit!

Isn't the income threshold for EITC way lower than 97k anyway? I thought it was like 50-60k max even with kids? so the pension vs earned income distinction wouldn't matter in your case?

One thing to consider - could you contribute to traditional IRAs for both you and your husband to lower your AGI? Might help with other income-based benefits even if EITC is out of reach.

The rollover option @Yuki Tanaka mentioned is crucial - if you took that pension distribution within the last 60 days, you can still roll it into an IRA and it would be treated as if the distribution never happened for tax purposes. This would bring your AGI back down significantly and potentially make you eligible for EITC again. Even if the 60-day window has passed, there are sometimes hardship exceptions available. Given that you mentioned needing the money for home repairs, it might be worth exploring whether any exceptions apply to your situation. If rollover isn't possible, definitely look into maximizing traditional IRA contributions for both you and your husband to reduce AGI. Also consider whether the home repairs qualify for any energy efficiency credits or other tax benefits that could help offset the higher tax burden from the pension distribution.