IRA Deductibility
H&W both retired in June of 2014 and both were participants in employer retirement plans, actually 403Bs, as they are both teachers. Their wages were $73,9873 state tax refund of $11, teacher’s pensions of $22,608 and taxable socsec of $13,926, a $292 educator expense deduction, a TIRA deduction of $3600.00. Knowing that the MFJ full deductibility limits for a ’14 TIRA, both being participants in an employer plan is MAGI below $96K, partial up to $166K. The IRS has an MAGI computation table that takes AGI, which for them is $106781 adds back the IRA contribution and subtracts the taxable social security. If this is correct then the MAGI is $96455. First question is–Is this the correct way to calculate this? Second question–if it is correct, how does the limit on deductibility work? For example if only $455 is over the limit and $455 is 2.3% of $20K is 87.7% deductible? TY
Permalink Submitted by Alan - IRA critic on Wed, 2015-04-01 21:08
Yes, this is the dreaded 3 worksheet Appendix B in Pub 590 A. Worksheet 2 produces the IRA deduction, and there is rounding involved in the computation. But if MAGI is only slightly above 96k, then almost all of the contribution will be deductible. The rest will be non deductible and perhaps should be returned to the taxpayer or recharacterized as a Roth contribution. When Appendix B applies, it is best to use tax software to reduce a major risk of error in doing these worksheets manually.
Permalink Submitted by Anthony Zalesky on Wed, 2015-04-01 22:28
Here’s my follow up question–Doing worksheet 2 in Appendix B in Pub590A, specifically as it relates to the final part consisting of items 1 through 8. #5 states to enter comp minus deductions on lines 27 and 28 on their 1040 of which there were none. It goes on to state if lower income spouse “include your spouse’s comp reduced by his or her traditional IRA and Roth for this year.” How do you do that when you’re trying to figure out what is deductible. Their desire was to have $3600 of deductible IRA contributions for ’14. For line #5 I put the higher earning spouse’s income in without an IRA deduction. On line #6 the deduction was $1830. Would that mean they each can contribute $1830 to a TIRA this year and it is fully deductible? Could one of them contribute $3600 to their own TIRA and accomplish the same thing?
Permalink Submitted by Alan - IRA critic on Wed, 2015-04-01 23:42
Re line 5, the worksheet is asking for taxable comp on which a contribution can be made, whether deductible or not. The line is intended to place a cap on the gross amount of an IRA contribution taxpayer is eligible to make including spousal contributions in order to avoid an excess contribution being made. I think that one spouse making the total IRA deductible contribution would be OK, but not 100% sure of that. Not sure why you are coming up with 1830 each now when you expected it to be much higher than that in your initial post.
Permalink Submitted by Anthony Zalesky on Thu, 2015-04-02 11:58
Thanks Alan, I appreciate all your help. The 1830 is the amount from doing the calculation from the worksheet.