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Non qualfied IRA contribution reduces health insurance penalty

fredr
Level 3

I have a client who has insurance under Obamacare  who has no earned income. They have a large penalty because other income was over threshold. By contributing money to a IRA this penalty goes away. Why does program allow this if they are not qualified to contribute to IRA.

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TaxGuyBill
Level 14

I see what is going on now.

On the 1099-R worksheet, scroll about 1/2 way down and click the "Quickzoom" for the "Quickzoom to enter traditional IRA basis".

On the sheet that opens up (the "IRA Info Wks"), go down a few lines to Line 18.  Enter the $601,200 on that line.

 

What is going on is that the $5000 contribution adds some Basis to the IRA.  That means part of the IRA withdrawal is not taxable, which reduces the MAGI for the Premium Tax Credit. 

But until you add the $601,200 to Line 18 of the IRA Info Wks, it is incorrectly treating the entire $5000 as a full Basis of the withdrawal (effectively resulting in $5000 less income).  When you enter the $601,200 to Line 18, it will properly prorate the $5000 of Basis.  It will still slightly reduce the taxable income, but not enough to qualify for the credit.

That is an interesting situation that I hadn't thought of before.  If they had no other IRAs (the $601,200 was not there), that would a method that would have worked to qualify for the credit.

 

I suspect that @rbynaker  would find this interesting too.

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12 Replies 12
TaxGuyBill
Level 14

First, it is NOT a "penalty".  It is a repayment of a credit that the taxpayer does not qualify for.

 

Have you gone through the error check, such as entering the year-end amount of the IRAs..

Have you double checked that there is no "compensation".  Look at Line 1 of form 1040, Line 2 and 3 of Schedule 1 any Partnership K-1 profits or non-taxable combat pay.

Have you checked that the IRA deduction is showing up on Line 19 of Schedule 1?

fredr
Level 3

This is return,type in pro series and see what you get

married filing joint both under 65

ira distributions $66585.00

1095a info

monthly Enroll premium 743.53

second lowest silver plan $1249.51

monthly advance payment $ 743.53

Fed tax withheld $6657.00

balace due $6938.00

now put 5000 contribution to ira

now shows refund of $2284.00

Why????   No earned income

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TaxGuyBill
Level 14

Have you done what I said, including "Have you gone through the error check, such as entering the year-end amount of the IRAs."?

fredr
Level 3

Yes I put in year end value of IRA of $601200 and I get full take away of $8922.00 advance premium payback before $5000.00 Ira contribution. THis is a simple tax return please see if you get same results I get. The distribution code of 1099r box 7 is a code 7.

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TaxGuyBill
Level 14

I see what is going on now.

On the 1099-R worksheet, scroll about 1/2 way down and click the "Quickzoom" for the "Quickzoom to enter traditional IRA basis".

On the sheet that opens up (the "IRA Info Wks"), go down a few lines to Line 18.  Enter the $601,200 on that line.

 

What is going on is that the $5000 contribution adds some Basis to the IRA.  That means part of the IRA withdrawal is not taxable, which reduces the MAGI for the Premium Tax Credit. 

But until you add the $601,200 to Line 18 of the IRA Info Wks, it is incorrectly treating the entire $5000 as a full Basis of the withdrawal (effectively resulting in $5000 less income).  When you enter the $601,200 to Line 18, it will properly prorate the $5000 of Basis.  It will still slightly reduce the taxable income, but not enough to qualify for the credit.

That is an interesting situation that I hadn't thought of before.  If they had no other IRAs (the $601,200 was not there), that would a method that would have worked to qualify for the credit.

 

I suspect that @rbynaker  would find this interesting too.

View solution in original post

Terry53029
Level 11
Level 11

When I put in info as you said, they owe $6938. if I put a $5000 IRA contribution they now owe $7238.

I did not put anything on worksheet except for the $5000.

Edit at first I did not check IRA box on 1099R .Bill has the solution

fredr
Level 3

Thanks Tax Guy Bill

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rbynaker
Level 11

Thanks Bill.

ProSeries gives wildly incorrect answers when it comes to IRAs if you don't go step by step and enter basis, FMV, etc.

Rick

TaxGuyBill
Level 14

I never thought of intentionally contributing to a Traditional IRA when the taxpayer doesn't qualify for it.  But doing so in certain circumstances COULD reduce income enough to fall below the 400% threshold for the Premium Tax Credit.

rbynaker
Level 11

At best that's going to be an extremely fringe case.  1) You have to have IRA distributions in the same tax year, and 2) You have to have very little left in IRAs for the allocation to be meaningful.

sjrcpa
Level 15

Wouldn't there be an excess contribution penalty?


ex-AllStar
rbynaker
Level 11

Yes.  But in many of these "fall off a cliff" situations, it's costing taxpayers 5-figures in APTC repayment.  So a little 6% penalty isn't going to hurt anyone. 🙂