I was notified that my father had a life insurance policy with me as beneficiary from 26 years ago. I was paid the policy plus almost $4,000 in interest. They claim I will get a 1099 for this interest income. Will this exempt my wife from receiving the earned income credit for our child? We file jointly.

ANSWER

The BIDaWIZ Team's Answer:

The interest income that the insurance policy may have earned between the time of your father's death and when the death benefit is paid out to you would be taxable. This is referenced in IRS Publication 17. This would fall under the investment income restriction for applying for the earned income credit. Specifically, you cannot have investment income of $3,300 or more. This is referenced in IRS Publication 596 and IRC Section 32.