Earned income tax credit - how much can you actually make but receive this?

[ender]

EITC definition

Earned Income and adjusted gross income (AGI) must each be less than:


• $46,997 ($52,427 married filing jointly) with three or more qualifying children
• $43,756 ($49,186 married filing jointly) with two qualifying children
• $38,511 ($43,941 married filing jointly) with one qualifying child
• $14,590 ($20,020 married filing jointly) with no qualifying children

While I filed single last year, so this isn't too relevant to me, some discussion here got me thinking - "how much money could you make but still receive this tax credit, assuming you were married with two kids?"

Assuming you have a HDHP and are married (I'll make this easier assuming a stay at home parent), working for a company with a 401k, as best I understand it, you should be able to reduce your AGI by:

• $17,500 for 401k
• $11,000 for both traditional IRAs
• $6,550 for HSA

For a couple, this is a total of about $35 in reductions to AGI (add $17.5k if you have a working spouse maxing 401k). This means you can effectively have yearly income of $49,186 + $35,050 = $84,236 before reaching the upper bound of the EITC cutoff. Or even higher if you have health insurance paid pretax too.

Is this right? Do deductions like this count against your earned income? I realize for most of the working population making $85k and saving $35k pretax is basically a pipe dream but it would seem for mustacians this makes the "roth vs traditional" distinction more important for both IRA/401k. Especially considering roth conversion possibilities.[/list]

Here's what the estimator tool says regarding AGI:

Adjusted gross income, or AGI, is income, such as wages, interest, pensions, and alimony received by you, and reduced by specific deductions, such as an IRA deduction or alimony payments made by you. AGI does not include adjustments for personal exemptions, the standard deduction, or itemized deductions.

It also estimates that you receive at $1,750 credit if you get your AGI to $40k a year with two kids.

[Emilyngh]

I believe that both your earned income AND your AGI have to fall below the threshold to get the EITC, so no driving your income down via 401ks and IRAs to make you eligible like you can with the Saver's Credit and Obamacare subsidies.

This.   If it were just AGI we could get our income low enough to qualify.   But, neither your earned income nor AGI can go over the limits, no way can we qualify (until RE).   But, like you state, we can get our AGI low enough for the saver's credit, and would qualify for ACA subsidies if I didn't have insurance through work.

[PeachFuzzInVA]

EITC definition

Earned Income and adjusted gross income (AGI) must each be less than:

• $46,997 ($52,427 married filing jointly) with three or more qualifying children
• $43,756 ($49,186 married filing jointly) with two qualifying children
• $38,511 ($43,941 married filing jointly) with one qualifying child
• $14,590 ($20,020 married filing jointly) with no qualifying children

See above

[teen persuasion]

I believe that both your earned income AND your AGI have to fall below the threshold to get the EITC, so no driving your income down via 401ks and IRAs to make you eligible like you can with the Saver's Credit and Obamacare subsidies.

This.   If it were just AGI we could get our income low enough to qualify.   But, neither your earned income nor AGI can go over the limits, no way can we qualify (until RE).   But, like you state, we can get our AGI low enough for the saver's credit, and would qualify for ACA subsidies if I didn't have insurance through work.

Only half right. Using 401ks reduces your line 7 wages, so it will get you lower/ closer to qualifying, or get you a larger credit. Using tIRAs usually won't help, though, because they figure the credit using both line 7 and AGI, and you get whichever is smaller. One thing that may catch mustachians is the limit on investment income: $3300 per year. Going over that amount and you get $0 credit.

Employer deductions for HSAs also work.

I definitely use this strategy; having DH max his 401k increases our credit from roughly $325 to $4010. Our state matches the EITC at 30%, so that goes from $97 to $1203.

One quirk in the rules that I recently discovered is that if your line 7 wages are in a certain range (basically before the phaseout kicks in), the test on AGI is eliminated.  I intend to make use of this for the Roth pipeline while I work part time and my wages will be within the range. Otherwise, transfers to the Roth would reduce the EITC.

I misread the rules there - it actually says that if your AGI is below the phaseout range then it is ignored and only wages are used. That means that transfers to the Roths have an added cost, the phaseout of EITC, and state matches of EITC.

[ender]

hmm, so a Traditional IRA is only beneficial if you have less than $11k in 401k contributions for the year?

[teen persuasion]

I haven't explained it well, it is pretty complicated. When figuring how much credit you will receive, you look up in the EITC table the credit for your line 7 wages (which are already reduced by any 401k deductions and any HSA deductions). Then you look up the credit amount on your line 38 amount (AGI). Your credit is whichever credit amount is lower.

If you look at the EITC table, you will see that the credit amounts start low, increase with greater income, level off for a while, then begin dropping with greater income amounts (phaseout). So it is sometimes beneficial to increase income, sometimes better to decrease income, depending on where you are on the scale. Unless you are pretty low income, however, it is probably more beneficial to lower you income to prevent phaseout.

Because you figure the credit twice, lowering your AGI below your line 7 wages ( by contributing to a tIRA) won't increase your EITC. If you had other income in addition to wages that increased your AGI, contributing to a tIRA to get your AGI to match line 7 would be helpful. However, other income such as investment income could disqualify you from the EITC.

You really need to walk thru the steps to see if you qualify, first, and then look up in the table different wage levels (with and without 401k) and AGI levels.

[teen persuasion]

As a Q&D example, if DH's and my gross income is $50k and have 3kids we claim, and no payroll deductions are made, line 7 is $50k, EITC on that is about $325.  If we contribute to tIRAs $11k, our AGI is $39k, and the EITC on that is $2641. Since our credit is whichever amount is smaller, we get $325.

If DH maxes his 401k, our line 7 wages are $32500, the EITC on that is $4010. Our AGI is pretty much the same (add a little interest, subtract the teacher $250), so the EITC is the same. If we again add the tIRA, our AGI would be $21500, and the EITC on that is $6044, the max. However, the credit on our wages is smaller, so we only get the $4010.

For our simple tax return, contributing to tIRAs won't increase our EITC, but payroll deductions help enormously.