IRA Contribution - Types of Deductions / Benefits

[tccpg289]

Taxpayer X (Married Filing Jointly) has an AGI of $244k. This income includes W-2, 1099-R, 8949 sale of a second residence, and social security income.

When I am going through the tax return, I am determining if a traditional IRA is fully deductible. The husband participated in a retirement plan at work in 2020, so that limits the spouse's contribution based on this table:

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines

What's very odd is when I enter the $7k traditional IRA contribution for the spouse, it is not coming through on line 10 as an adjustment to income in ProSeries, which I expect, since the taxpayer is above the MAGI.

However, it appears to be reducing the 1099-R IRA distributions that I am have on line 4a of the 1040.

Some of the 1099-R received have Code P, "Return of Contribution Taxable in 2019."

Is it possible that an IRA contribution can reduce/offset certain IRA distributions? In other words, the taxpayer is not getting the more conventional IRA deduction but is instead being allowed (for some reason I still don't understand) to offset IRA distributions that contain a certain code.

ProSeries is reducing the overall tax liability when I enter the IRA contribution despite being over the income limit.

The other thought is the consideration of the IRA with regards to the income type, meaning MAGI needs to account for sale of the home (i.e. it is not part of the income limit since it is not regular income).

[qbteachmt]

Oh, this is a lot of intertwined stuff that doesn't need to be so hard.

"When I am going through the tax return, I am determining if a traditional IRA is fully deductible."

Why not let the program do this part?

https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-l...

"meaning MAGI needs to account for sale of the home (i.e. it is not part of the income limit since it is not regular income)."

Did you mean "earnings" or "compensation?" Not all of your list of sources of income are taxable compensation as earnings, even though they might result in taxable income. All of this is needed for the IRA contribution analysis. Since you mention $7k for the spouse, I would assume the nonworking spouse is over 50. And that the W2 has a gross of at least $7k.

You mention AGI of $244k.

https://www.investopedia.com/terms/m/magi.asp

https://www.irs.gov/publications/p590a

"when I enter the $7k traditional IRA contribution for the spouse, it is not coming through on line 10 as an adjustment to income in ProSeries, which I expect, since the taxpayer is above the MAGI."

Line 19 would be IRA. You should have an IRA worksheet and likely will have a Form 8606.

"Some of the 1099-R received have Code P, "Return of Contribution Taxable in 2019.""

"Some?" What was filed on the 2019 1040? Did they make a corrective distribution by taking out funds in 2020 that were put into a Traditional IRA as 2019 money, but it turned out to be an error? This seems like "some" were excess contribution(s). Was this corrected before filing 2019? Or, later in 2020?

"ProSeries is reducing the overall tax liability when I enter the IRA contribution despite being over the income limit."

Are you properly marking T/S for these activities?

Are you trying to make a spousal contribution and spouse has one or more of these 1099-R? You never stated who these "some" 1099-R belong to.

[tccpg289]

Thanks for the response:

There are actually several 1099-R. The one I am focusing on happens to be in the name of the spouse, with distribution Code P. And yes, I am sure I am marking them as the spouse's item.

For the 2019 correction, I believe they were over the deduction limit so yes, it was a correction. I do not know if it was before or after the return was filed.

Yes, I am essentially trying to make a spousal contribution. I can confirm that on 8606, Line 1 is populating $7,000 as "Enter Your Nondeductible Contributions to traditional IRA for 2020."

And yes, there are several types of income that may not count against the IRA contribution income thresholds when a spouse (husband) participates in a plan at work.

[qbteachmt]

"The one I am focusing on happens to be in the name of the spouse, with distribution Code P."

A taxable distribution would be netted by a tax deductible contribution for the same person that is named on the 1099-R and is tagged for that contribution.

"For the 2019 correction, I believe they were over the deduction limit so yes, it was a correction. I do not know if it was before or after the return was filed."

Here's what matters: you seem to have a 2020 1099-R for something that applies to 2019. If it was not done by the filing due date of the 2019 return, filed in 2020, then it is considered also reportable and taxable in 2020.

"I can confirm that on 8606, Line 1 is populating $7,000 as "Enter Your Nondeductible Contributions to traditional IRA for 2020."

Then it is not offsetting any taxable distribution for 2020.

It seems you have some reading to do on all of this.

[tccpg289]

It normally wouldn't be an issue. I was actually just testing the software, and when I enter the $7k under the spouse for Traditional IRA deductions, it reduces taxable income. But it does NOT list it as an IRA deduction, it is offsetting the IRA distributions line.

[qbteachmt]

https://www.irs.gov/publications/p590b#en_US_2020_publink1000230819

Has this section:

Figuring the Nontaxable and Taxable Amounts

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2020, you must use Form 8606 to figure how much of your 2020 IRA distribution is tax free.

[tccpg289]

On the "IRA Information Worksheet," I am prompted to enter the combined value of all traditional IRA on line 18.

Is this figure simply the FMV of the IRA based on the 5498?

When I enter these figures and also enter a non-deductible IRA contribution, it decreases the non-taxable portion of the IRA Distributions on Form 8606. If I do not enter these figures, the non-taxable portion of the IRA distribution increases significantly.

[sjrcpa]

"Is this figure simply the FMV of the IRA based on the 5498?"  Yes.

[tccpg289]

So the value in an IRA appears to impact the ability of a contribution to offset a distribution.

There is no basis in the IRA.

Is it correct that the FMV of an IRA on the 5498 impacts the taxable amount of a distribution (where there are also contributions)?

[Accountant-Man]

<<Some of the 1099-R received have Code P, "Return of Contribution Taxable in 2019.">>

This is not an IRA distribution. It is an over-contribution to a retirement pan at work, probably 401k, due to the employer's contribution limitations.

[qbteachmt]

I'm even more confused now; the 1099-R, if there is one that reflects overcontribution condition and corrective distributions for the employee name on that 1099-R for their 2019 correction, is or is not the Spouse that has no 2020 taxable compensation and wants to have a spousal Trad IRA contribution made on their behalf?

"Is it correct that the FMV of an IRA on the 5498 impacts the taxable amount of a distribution (where there are also contributions)?"

You stated there is no basis, which yes, would typically affect the taxable amount of a distribution. But it's hard to tell if there is excess in an account; excess in an account means it affects the FMV the same as having Basis.

You have too many details in the scenarios where you are asking vague questions of people on the internet. What you need to do to understand how these things all impact each other, across years, account types, etc, is to take them in order and by account/plan type. For instance, a 1099-R with P means that should be reported in 2019, and if you are working on 2020, that distribution would be moot.