which MAGI to use for Roth income limit
I have a new client that made a Roth contribution for tax year 2015. Her MAGI per the original 2015 return was within the phaseout range and the allowable Roth contribution was less than the amount she contributed. Apparently, the previous return preparer didn’t consider the phaseout or report the excess contribution.
On review of the 2015 original return I found where gross income had been overstated but still within the Roth MAGI phaseout range. I am going to amend the return to correct MAGI and to address the proper allowable Roth contribution. My question is: Which MAGI is to be used (as per the original return or the amended return) when determining the allowable Roth contribution?
Permalink Submitted by David Mertz on Thu, 2018-08-09 13:27
The complete amended tax return must be internally consistent. There is only one MAGI, the true MAGI. The true MAGI is determined on an accurately prepared tax return and would be the one determined from the correctly prepared amended tax return. Anything calculated from the original incorrect tax return is irrelevant. It would be unreasonable to allow someone to file an erroneous tax return to establish a fake MAGI to allow one to be under the limit and permit a Roth IRA contribution, then allow one to correct the tax return to show the true higher MAGI value and still avoid the Roth IRA contribution being an excess contribution.
Permalink Submitted by Alan - IRA critic on Thu, 2018-08-09 16:13
It wasn’t stated what was done with the excess Roth contribution on the original return. If it was removed with allocated earnings, that action cannot be altered at this time, and an additional contribution cannot be made due to expired deadlines. However, if an excess contribution excise tax was paid, an amended return with Form 5329 can be filed for refund of the excise tax to the extent it was higher than the correct amount. There are other possible scenarios as well depending on how the original excess was handled.
Permalink Submitted by David Mertz on Thu, 2018-08-09 16:40
My impression from the original post is that nothing has been done yet to correct the excess. Since it’s now long after the due date of the 2015 tax return, an excess that remains after amending the 2015 tax return must be eliminated by either being able to apply it as a subsequent-year contribution or distributing it as a regular distribution with no allocated earnings. Unless the excess can be applied as a 2016 contribution, it’s likely that the 2016 and 2017 tax returns also need to be amended to report the excess contribution for those years as well.