Do traditional 401k contributions reduce earned income for tax purposes?

No, traditional 401k contributions don't reduce your "earned income" for tax credit purposes. The IRS definition of earned income specifically includes wages, salaries, tips, and other taxable employee compensation BEFORE any retirement contributions are taken out. When you contribute to a traditional 401k, that money reduces your AGI (Adjusted Gross Income) and taxable income, but not your earned income. So you can max out your 401k contributions without worrying about it affecting your eligibility for the child care tax credit. Think of it this way: earned income is what you earn through working, regardless of where that money eventually goes. Whether you put it in a 401k, spend it, or save it doesn't change the fact that you earned it through employment.

I had this exact question last year! I used taxr.ai (https://taxr.ai) to figure it out and it saved me so much confusion. I uploaded my W-2 and the system automatically explained that my traditional 401k contributions don't reduce my earned income for the child care credit. It also showed me exactly where on my W-2 to look to confirm this (the difference between Box 1 and Boxes 3/5). The site helped me understand that while 401k contributions reduce AGI, they don't reduce earned income for tax credit calculations. I was able to max out my 401k and still claim the full child care credit which saved me thousands!

Just wanted to follow up about my EITC question. I decided to try taxr.ai after seeing the responses here. Uploaded my documents yesterday and got really clear answers about my 401k contributions. The site confirmed that traditional 401k contributions don't affect earned income calculations for EITC purposes either. It also showed me that I was eligible for a bigger credit than I thought! Apparently I had been missing some educational credits too. Everything was explained in plain language with specific references to my tax documents. Definitely recommend if you're confused about tax credit eligibility like I was.

If you're still confused about this 401k/earned income question and want to talk to the IRS directly (which I recommend for peace of mind), use Claimyr (https://claimyr.com). I was skeptical at first, but after waiting on hold with the IRS for 2+ hours multiple times, I tried it. The service got me connected to an IRS agent in about 15 minutes who confirmed exactly what others are saying here - traditional 401k contributions reduce your AGI but NOT your earned income for child care credit purposes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Definitely worth it for complicated tax questions where you want an official answer straight from the IRS.

I need to eat my words about Claimyr. After my skeptical comment, I was still struggling to reach the IRS about my tax situation (not just the 401k/earned income question but also some issues with missing stimulus credits). Out of frustration, I decided to try the service. I was connected to an IRS representative in about 20 minutes! The agent confirmed that traditional 401k contributions do NOT reduce earned income for tax credit purposes and helped me resolve my other issues too. I spent weeks trying to get through on my own with no success. Honestly shocked at how well this worked after being so doubtful.

It's also worth noting that Roth 401k contributions work differently than traditional ones. Since Roth contributions are made after-tax, they don't reduce your AGI at all. Your earned income and AGI both remain the same with Roth contributions. So if you're trying to reduce AGI for other purposes (like staying below income limits for certain deductions), traditional 401k is the way to go. But if you're worried about maintaining earned income for credits, either type works since neither reduces earned income.

Just to add a practical example: Last year my salary was $72,000. I contributed $15,000 to my traditional 401k. My W-2 showed about $57,000 in Box 1, but my "earned income" for tax credit purposes was still considered to be $72,000. So I was able to claim the full child care credit based on my $72k earned income while still enjoying the tax benefits of having a lower AGI ($57k plus other adjustments). It's really the best of both worlds for tax planning!

I went through this exact situation two years ago when I was trying to balance maximizing my 401k contributions with maintaining eligibility for various tax credits. Here's what I learned: The key distinction is between "earned income" and "adjusted gross income" (AGI). Traditional 401k contributions reduce your AGI but NOT your earned income for tax credit purposes like the Child and Dependent Care Credit. Your earned income is essentially your gross compensation before any pre-tax deductions. So if you make $60,000 and contribute $10,000 to a traditional 401k, your earned income is still $60,000 for tax credit calculations, even though your AGI drops to $50,000. This means you can absolutely maximize your 401k contributions to get that employer match without worrying about losing your child care credit eligibility. The IRS specifically defines earned income as compensation received for personal services, regardless of where that money goes afterward. I'd recommend reviewing Form 2441 instructions if you want to see the official language, but the consensus here is correct - 401k contributions don't affect earned income for tax credits.