My w2 includes deferred compensation which shows in box 11 as a non qualified plan distribution. does this count as earned income?

Forum|Forum|5 years ago
February 24, 2021
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TurboTax Self Employed Online

MinhT1

Level 15

No. Deferred income is not earned income in the year it is deferred.

It will be earned income in the year it is received.

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DAYLEA

Level 2

Why is income from a nonqualified pension on a W-2 not considered "earned income" in the year you receive the non-qualified income on a W-2? For 2021 taxes turbotax told me it was earned income and as a result advised I should open a Roth for 2021. This year for 2022 Turbotax it is saying it is not "earned income" and I need to cancel the Roth I opened, because I have no earned income. That is a nightmare. What changed from 2021 turbo tax to 2022 turbo tax? In 2021 taxes it said it was earned income, now it is saying the same nonqualified pension distributions are not earned income, one year later for 2022. Help.

JohnW152

Level 15

It's not a change in the TurboTax programming; rather, it's a situation in which amounts reflected in Box 11 of your Form W-2 can have a different characterization from one year to the next.

According to Box 11 in the Instructions for Employee on the back of Form W-2:

This amount is (a) reported in box 1 if it is a distribution made to you from a nonqualified deferred compensation or nongovernmental section 457(b) plan, or (b) included in box 3 and/or box 5 if it is a prior year deferral under a nonqualified or section 457(b) plan that became taxable for social security and Medicare taxes this year because there is no longer a substantial risk of forfeiture of your right to the deferred amount.

So, if a Box 11 amount was reported in Box 1 of Form W-2 one year, an amount can be included in Box 3 and/or 5 the next, characterized differently because "there is no longer a substantial risk of forfeiture of your right to the deferred amount."

Please see Box 11 -- Nonqualified plans in the General Instructions for Forms W-2 and W-3 for more information.

@DAYLEA