Hey, folks! I have a situation that TurboTax seems to handle in a different manner than I was expecting.
I currently have a certain amount of Schedule C earned income - let’s say $16,000 for the purpose of this question. My spouse has zero earned income. We have no other earned income, just passive type things. My intent is to maximize both my and my spouse’s Roth IRA contributions for the year.
I was operating under the assumption that my Schedule C income would allow us to max out our Roth IRA contributions. In fact, I contributed in 2021 under this assumption.
However, TurboTax tells me that my spouse over-contributed by the entire amount of the contribution, apparently because my apparently Schedule C income belongs to me and not my spouse, and can’t be combined like W-2 income can be for contribution limit purposes?? Is this true, and how does it make sense?
If I lie to TurboTax and say the income belongs to both of us, it wants me to split the income and create a Schedule C for both of us. Is that the best solution?
I currently have a certain amount of Schedule C earned income - let’s say $16,000 for the purpose of this question. My spouse has zero earned income. We have no other earned income, just passive type things. My intent is to maximize both my and my spouse’s Roth IRA contributions for the year.
I would point out that you don’t just get to make contributions of the entire Schedule C income. You need to adjust the Schedule C income down by your deductible SE tax before to figure the maximum amount that can be contributed to an IRA. I will use a lower income than you suggested to make the point clear:
On $12,000 in Schedule C income, your SE tax would be $1,696. 50% of that, or $848, is deductible, so it cannot be contributed to an IRA. Therefore, the most you and your spouse could contribute of the $12,000 would be $11,152 to the combination of your IRAs. So you could contribute $6,000 and your spouse could contribute $5,152. Or, if you are over 50, you could contribute $7,000 - that would limit the contribution for your spouse to $4,152
After reading IRS Publication 590-A (a guaranteed cure for insomnia) I’m going to go with a TT bug. I see nothing that would explain why TT is treating Schedule C income differently than W-2 income.
Regardless, it’s moot now and I’m going to punt to next year. It turns out we have to pull our 2021 contributions anyway, because we had an unexpected capital gain in December that puts us over the Modified AGI limit. The reason I’m asking is because I’d like to put the withdrawn excess contribution right back in for 2022. I guess if TT does it again for 2022, or the answer to this question becomes clearer, I can pull it again next tax season if needed.
Hey, the good news is now I can go put in all my Schedule C expenses that I deliberately ignored, just so we could max out our IRAs…
Bruce
Who yes, before you ask, has indeed filed an extension…
Highly unlikely. There is nothing in this area that has changed in many years. And there are lots of people with the same fact pattern you mention - self-employed who want to make a contribution to both spouses’ IRAs.
If this were a TT bug, it would have surfaced a couple of months ago.
Hey, the good news is now I can go put in all my Schedule C expenses that I deliberately ignored, just so we could max out our IRAs…
I don’t think they care, because I am paying extra taxes by not declaring expenses I’m entitled to.
But you are also claiming a benefit - an IRA contribution - that you would NOT be entitled to. And that contribution gives you tax deferred income (or tax free if it’s in a Roth). So you might be paying a bit more in one year, but paying less in taxes than you should in future years.
LOL… no. The IRS is quite happy if you don’t take deductions to which you are entitled. ---------------------------------- Not when those unclaimed deductions qualify you for some other tax benefit. Like an IRA contribution. –Peter
I remember a case published quite a few years ago when a guy got in trouble for omitting deductions to increase Schedule C income to pay more in SE tax so his future Social Security benefits would be higher. He didn’t have much other regular tax liability because of other deductions or losses.
I remember a case published quite a few years ago when a guy got in trouble for omitting deductions to increase Schedule C income to pay more in SE tax so his future Social Security benefits would be higher. He didn’t have much other regular tax liability because of other deductions or losses.
Thanks for the feedback, folks. I will talk to my tax critter and ask if I’m skirting the edge here.
Since (I assume) neither of us is a member of a tax court, or a tax attorney, we’ll just have to agree to disagree.
I think when you said:
“my Schedule C expenses that I deliberately ignored, just so we could …”
It shows you intentionally changed your tax form from what you believe it should say.
So while I’m not a tax expert, if I were on a jury, I’d say that was intentionally deceiving the government - ie. fraud.
In sort of the opposite situation - I think if you had expenses you couldn’t substantiate (no receipts, etc) - and you had put them on your schedule C - the government could disallow those expenses.
I remember a case published quite a few years ago when a guy got in trouble for omitting deductions to increase Schedule C income to pay more in SE tax so his future Social Security benefits would be higher. He didn’t have much other regular tax liability because of other deductions or losses.
There is an important semantic difference. You are required to take all deductions that impact AGI. You are not required to take all deductions that reduce AGI to taxable income. Since your business deductions affect your AGI, they affect all benefits which are dependent on AGI. The most common offense is ignoring deductions to maximize EITC, but all of the other AGI and MAGI-based credits are covered by this.
Rereading my response above, I realize it could be misinterpreted. It was meant to support Wradical and criticize the OP. I should have chosen one of the earlier posts to quote for my response.
