1

As an example:

  • I have $20,000 in Box 1 on my wife and my only W2
  • I have $35,000 in Box 3 (reflecting significant pre-tax 401(k) deductions)
  • Filing MFJ with no kids

For 2016, to claim EITC both earned income and AGI must be below $20,430 for a couple with no kids.

The IRS page for "what is earned income" includes:

Wages, salaries, tips, and other taxable employee pay;

My understanding is that AGI is reduced from the 401(k) contributions but what about earned income?

It reads to me that only W-2 income which shows in Box1 of a W-2 counts. Given the language similarity on the W-2 vs the IRS page, it sure seems this is the case but I cannot find anything authoritative anywhere about this.

3

401(k) contributions are not included as Earned Income. Following the instructions for calculating Earned Income for the EITC (page 56, step 5), the first component in calculating Earned Income is "line 7 of form 1040." (The other components are subtractions from that amount or nontaxable combat pay, which you have not mentioned.)

The instructions for line 7 state: "For most people, the amount to enter on this line should be shown in box 1 of their Form(s) W-2." As you note, box 1 is net of 401(k) contributions; accordingly, such contributions are not considered as earned income for EITC purposes.

It would be a good idea to complete the entirety of the worksheet for lines 66a and 66b of form 1040 (which are for the EITC) to ensure you meet all eligibility requirements. That form starts on page 54 of the above linked instructions.

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