How can a W2 income be made non taxable? How can we adjust this so that it is not counted as earned income and also to get the earned income credit?

[chettimsina]

A client has a W2 with income taxes withheld by the federal and state. Per IRS notice 2014-7, the income appears to be non taxable and thus it is not a earned income. How can we adjust this so that the W2 income be made non taxable as well as get the earned income credit as per the reduced earned income from other sources? Specifically, I am looking for this W2 income appearing is Earned Income Credit Worksheet line 2b.

[Just-Lisa-Now- · Accepted solution]

I know over in TurboTax they say to put both the W2 income and the adjustment on Line 21.  Then you'd need to include the withholdings on the tax payment worksheet.

But I've seen in here, people input the W2 as usual, then on the EIC worksheet, classify it as "halfway house" income so that the EIC wont compute, and back it out on Line 21 with the IRS Notice 2014-7 exclusion.

[IRonMaN]

Yeah, I prepared one over the weekend that I entered the W-2 as normal, backed it off as an adjustment to other income and then entered the W-2 source of income as a license plate maker to kill the earned income credit.  A nice little box saying “kill the EIC” would be nice and wouldn’t make me feel so dirty :smile:

[Just-Lisa-Now-]

and I just noticed that you can mark a box on the W2 worksheet that its inmate income, so you wouldn't even have to fiddle with the EIC worksheet.