Does unemployment compensation wages affect earned income credit on your taxes?

Yes, it can. However, it cannot help you, only hurt you. First of all, for 2009, the first $2,400 of unemployment compensation is not taxable, so it doesn't affect your taxes in any way. Above $2,400, it is taxable and increases your AGI (adjusted gross income).

The earned income credit (EIC) phases in at 40% of earned income until it reaches the maximum credit. (See the IRS link below for specific amounts.) Unemployment compensation does not count as earned income, so it does not increase your credit.

After you max out the credit, it starts to phase out as your income increases. The income amount used here the greater of your earned income or your AGI. Therefore, if your AGI is made up only of earned income and unemployment compensation, your EIC will be reduced because of your unemployment compensation.

There are many other items than can increase or decrease your AGI, including interest income, IRA contributions or withdrawals, student loan interest, and many more. So you could potentially offset the unemployment compensation with other deductions from AGI, such as contributing to an IRA. (Of course, you probably don't have the cash for that if you're collecting unemployment.)

Here is a link to the EIC figures for 2009 (at the bottom of the page):

http://www.irs.gov/individuals/article/0,,id=150513,00.html

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Unemployment does NOT count towards your EIC because it is not EARNED. Your UC is applicable to federal taxes only. The IRS EIC calculator takes UC into consideration although it is not correct.