deferred compensation as earned income

[klingermantt]

Why is TurboTax 22021 allowing my deferred income from a 457b from box 1 on W2 to be reported as earned income for purpose on making an IRA contribution when box 11 on same W2 reports entire amount as from a nonqualified plan

[ColeenD3]

If the amount were included on Box 1 W-2, then that is how it would work. Any pension distribution should be reported on a 1099-R.

Your contribution to your 457 plan reported in box 12 has already been subtracted from your wages in box 1. This is not earned income.

[klingermantt]

The question is: why is Turbotax allowing this $10,000 contribution to be counted as "earned" income for the purpose of letting me make a $7000 IRA contribution and thus reducing my tax liability.  ( I'm referrencing IRS pub 590-A )

[ColeenD3]

The problem is that there is no way for a computer program to know what income is entered in Box 1 from your employer. It sees an amount and attributes it to wages because wages or income treated as wages are the only things that belong in Box 1. Box 1, as earned income, allows you to make an IRA contribution.

[klingermantt]

In other words: If box 1 on W2 shows an income, this amount can be used to support earned income in regard to an IRA contribution regardless of amount reported in box 11 on the W2?

[JamesG1]

This IRS document called Eligible Deferred Compensation Plans under Section 457 appears to support the income as wages.  Page 4 states:

IV. INCOME TAX WITHHOLDING AND REPORTING ON § 457(b) PLAN

DISTRIBUTIONS

A. Income Tax Withholding on § 457(b) Plan Distributions

Distributions to a participant or former participant from a ' 457(b) plan are wages under § 3401(a) that are subject to income tax withholding in accordance with the income tax withholding requirements of ' 3402(a). The pension withholding rules of ' 3405 do not apply.

[TheRealTax2]

This is true. You'll notice that Medicare and social security taxes are taken out of the 457b contribution on your paycheck just like normal wages. You only get to defer fed and state taxes. When you pull money out of the 457b, guess what? No soc sec or Medicare taxes. This is for pre-tax of course and not Roth...