Do Public Assistance Benefits Affect Your Income Tax Return?

When you are out of work, your unemployment benefits are generally subject to federal income tax. But other types of public assistance benefits such as food stamps and WIC assistance are not taxable and do not have to be reported on your tax return.

According to the IRS, if you receive payments for taking part in a work-training program, your payments are not taxable if they are not more than the public welfare benefits you would have received otherwise. But if you receive more than the public welfare benefits, the entire amount of the payments you receive must be included on your tax return as wages. If you receive alternative trade adjustment assistance (ATAA) payments from a state agency, your payments must be included on your tax return as other income.

If you receive mortgage assistance payments under section 235 of the National Housing Act, these payments are not taxable. And Pay-for-Performance benefits you receive under the Home Affordable Modification Program are not taxable.

If you receive food benefits under the Nutrition Program for the Elderly, these benefits are not taxable. And payments you receive from the state to help you pay the cost of heating your home in the winter are not taxable.

Grants you receive under the Indian Financing Act to help you develop a profit-making economic enterprise on or near your reservation are not taxable.

If you receive public assistance benefits but you also work during part or all of the year and have earned income, you may be able to claim the earned income credit. Self-employment earnings can also qualify you for the earned income credit.

The earned income credit will reduce any tax you owe and will give you a refund if the credit is more than your tax liability. You can use the EITC Assistant on the IRS website to quickly find out if you are eligible for the earned income credit. And if you live in a state that has an earned income credit, you may also qualify for a credit and a refund on your state income tax return.

If you have children, you may also qualify for the child tax credit. This credit can be up to $1,000 for each qualifying child. If the credit is more than your tax liability, you may qualify for the additional child tax credit, which can give you a tax refund.

As indicated by the IRS, any tax refund you receive for claiming the earned income credit will not affect your eligibility for food stamps, Medicaid and supplemental security income (SSI), or low income housing. The earned income credit may affect your temporary assistance for needy families (TANF) benefits, so you should check with your state agency.

Sources:

EITC Home Page--It's easier than ever to find out if you qualify for EITC, IRS

Publication 525, Taxable and Nontaxable Income, IRS

Publication 596, Earned Income Credit (EIC), IRS