Income source for IRA contribution

Submitted by BruceM on Thu, 2015-02-12 01:16

At a local conference, I overheard an intriguing situation that no one seemed to know the answer to, so I thought I might ask it here….

A 65 year old couple have been retired for about 3 years, with no income other than a pension, SS and rental income from a 4-plex they own. Per their tax preparer’s suggestion, the income from the rentals was reported on Schedule E and based on this, deductible TIRA contributions were made to the couples TIRAs for the past 2 years. The owner is an active manager of the property, choosing renters, collecting rents and doing the light maintenance.

As I understand the rules, rental income does not qualify as ‘compensation income’.

Would it be possible to ammend past returns and replace the schedule Es with Schedule C’s to be able to make the deducctible IRA contributions, assuming they have at least the amount of contributions in earnings, or are they stuck and must go back and ammend past returns for the TIRA deductions taken, pay the annual 6% penalty and withdraw the TIRA contributions?

Thanks

BruceM



Submitted by Alan - IRA critic on Thu, 2015-02-12 16:11

  • Bruce, see attached:   http://www.irs.gov/publications/p527/ch03.html.  To use Sch C they would have to provide substantial services as defined and that is pretty unlikely in most cases they way these services are defined. And if they qualified, then SE tax would be due unless the net income was very low.
  • Otherwise, if the two years were 2012 and 2013, a 1040X would have to be filed to remove the TIRA deduction and 5329 to pay the 6% excise tax. Contributions could then be withdrawn tax free since the deduction was amended. For 2014, they can still remove any excess contribution with earnings up to the extended due date and avoid the excise tax.

 



Submitted by BruceM on Thu, 2015-02-12 23:19

I understand what you are saying and I’ve read through Pub 527. It sounds like they would qualify to file a Schedule C…lets assume they are. Can they go back and ammend past year’s returns to delete the Schedule Es and add the Schedule Cs? I don’t see any reason why they can’t, assuming they’ve kept all supporting documentation to show they provided substantial services. ThanksBruceM



Submitted by Alan - IRA critic on Thu, 2015-02-12 23:31

Sure, if they qualify for Sch C but the SE tax should be factored in. In addition, it would be a red flag to change the Schedule unless something justifies it, so that would mean Sch C each year until something changes. 



Submitted by BruceM on Thu, 2015-02-12 23:34

That’s what I figuredThanks againBruceM



Add new comment

Log in or register to post comments