Right, so I made time. This stuff just intrigues me so I had to. Very interesting results, but make sure you read these assumptions first:
1) Don't have any investment income > $3,350 or you are disqualified from the EIC; I used $3,300 Q Divs.
2) Don't earn too much income or you will be disqualified from the EIC.
3) Roth IRA withdrawals do not count against the EIC.
4) T. IRA withdrawals (and conversions from T to Roth) add to gross income and count against the EIC.
5) If you see IRA distributions, then less Roth portion, all that must be Roth principal for this to work.
6) If you don't see less Roth portion, it came out of a T.IRA (assume it's a T to R conversion).
7) This is 2013 tax data because it's the best available resource to me to calculate this all accurately.
8) This ignores states.
9) This ignores the AFA subsidies since they weren't around yet.
10) IRA contributions didn't help anything since there is no federal tax, so I left them out. If you make more this could come into play, and you might get a savers credit. But earning more might boot you out of the EIC, depends on deferrals.
11) The earned column assumes the $20K is wages or a schedule C, the passive column assumes the $20K is rental income.
Sorry about the formatting, I'm still working on this skill. The first 2 columns are a DINK couple. The next 3 columns are a married couple with 2 kids (which is my situation, so I used it). I used the standard deduction across the board.
| | DINK | | MFJ 2 Kids | | |
| | Earned | Passive | Earned | Earned | Passive |
| Business Income | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 |
| Qualified Dividends | 3,300 | 3,300 | 3,300 | 3,300 | 3,300 |
| IRA Distributions | 30,000 | 30,000 | 30,000 | 15,000 | 30,000 |
| Less Roth Portion | -30,000 | 0 | -30,000 | 0 | |
| 1/2 SE Tax | -1,413 | 0 | -1,413 | -1,413 | 0 |
| IRA Contributions | 0 | 0 | 0 | 0 | 0 |
| Standard Deduction | -12,200 | -12,200 | -12,200 | -12,200 | -12,200 |
| Exemptions | -7,800 | -7,800 | -15,600 | -15,600 | -15,600 |
| Taxable Income | 1,887 | 33,300 | -5,913 | 9,087 | 25,500 |
| Federal Tax | 0 | 3,611 | 0 | 578 | 2,441 |
| SE Tax | 2,826 | 0 | 2,826 | 2,826 | 0 |
| Total Tax | 2,826 | 3,611 | 2,826 | 3,404 | 2,441 |
| Earned Income Credit | 0 | 0 | -5,372 | -2,423 | 0 |
| Child Tax Credits | 0 | 0 | -2,000 | -2,000 | -2,000 |
| Balance Due (Refund) | 2,826 | 3,611 | -4,546 | -1,019 | 441 |
My take away from this: If you are going to shoot for the earned income credit, which is obviously a nice little benefit but only realistic with kids, you lose the ability to roll over your T.IRA into a R.IRA in a tax efficient manner. I created two versions of the "Earned" column to illustrate this under the 2 kids scenario. In one you are drawing only from Roth, and in the other you are drawing nothing from Roth but converting $15K from T to R which cuts your EIC and adds $3,527 to the balance due (24% effective tax).
Sol, I think you have 3 kids so this option looks appealing on the surface. If you are already Roth heavy it could be worth it. If you have a lot deferred it might hamstring your ability to convert everything into Roth before RMD's kick in. I see this as a temporary strategy if you get a side gig making a few dollars shortly after retirement. Or, maybe a long-term thing if you never deferred a lot to begin with for some reason. In any case, it seems to only make sense if you do everything you can to qualify for the EIC.
And lastly, I'm still not sure it would be worth owning the rentals in a C-Corp in order to generate earned income via a wage, because if this is a temporary strategy you would use for a brief time. Once the dependents disappear this loses a large part of it's appeal anyway. And for you DINKs, keep it passive, this strategy likely won't help you much.