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Non-deductible IRA contribution for client age 73 in 2019 lowering tax due

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Level 2

I have a client age 73 with W2 income, no retirement plan offered through his employment who wants to make a $7,000 IRA contribution. I understand that the Secure Act allows deductible IRA contributions at any age starting in tax year 2020, and does not apply to 2019.

Proseries Basic is correctly re-characterizing the contribution as non deductible in the IRA contributions worksheet and is not reporting the deduction on the 1040 as an adjustment to income. Proseries is also calculating a penalty for contributing of $420. However, when I take the $7,000 out from the IRA contribution worksheet the client's tax liability goes up by $756. I am really perplexed about this result. 

Does anyone have any ideas?

Thanks, Renee Snow, EA

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8 Replies 8
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Level 10

Just print the 1040 before and after the change.

My guess would be that maybe the $7K IRA basis would be partially allocating to the IRA RMD you have on a 1099-R making less of it taxable (which would likely not be correct).

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Level 2

I think you are on to something here that I had not considered. Basis coming out of the RMD is lowering the tax liability. I wonder if Proseries should fix this glitch? I really appreciate your help, thanks so much. 

Renee

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Level 12

"Basis coming out of the RMD is lowering the tax liability."

Always.

"even with the penalty the client's liability decreases by making a non deductible contribution. I am suspicious that it is a program error."

"with the penalty" is your sample scenario for increasing basis, so the RMD is going to be further allocated and the Basis portion is higher, as long as you have the entry for the nondeductible contribution (which isn't allowed, anyway). That isn't a program error. That's the math. If you need to, run the numbers on the IRS worksheet, using that $7k as basis or as additional basis, whatever applies to this person's scenario.

"Contribution and distribution in the same year.

If you received a distribution in 2019 from a traditional IRA and you also made contributions to a traditional IRA for 2019 that may not be fully deductible because of the income limits, you can use Worksheet 1-1 to figure how much of your 2019 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606."

https://www.irs.gov/publications/p590b#en_US_2019_publink1000230799

 

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Level 8

Deductible or not the age limit for 2019 for contributing to a traditional IRA is 70 1/2.

If the client has earned income they can contribute to a Roth for 2019.

As you said, starting in 2020 they can contribute to a traditional at any age.

Pretty sure the penalty is for making an excess (not allowed) contribution.

You can play with it to double check...change the contribution to a roth and you will see there is no penalty.

 

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Level 2

Thanks but what I'm saying is that even with the penalty the client's liability decreases by making a non deductible contribution. I am suspicious that it is a program error. I really appreciate your response though! 

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Level 1

Hi Renee!  Did you ever receive a response to this? I am running into the exact same issue.. Thanks!

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Level 1

I have this same problem.  Adds in a penalty, but reduces the taxes because it reduces the taxable amount of IRA distributions for the year even though they were reported as fully taxable. When I include the basis for 2018 and 2019 that's when the income tax reduces by quite a large percentage. Very confused as well.

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Level 12

"When I include the basis for 2018 and 2019 that's when the income tax reduces by quite a large percentage"

Basis reduces taxes owed. How is that not making sense?

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