Are roth conversions included in MAGI for determining IRA deduction?

[maughact]

My client received a letter from IRS that his IRA deduction was not allowed and should have been non-deductible.  However, according to the Lacerte IRA deduction worksheet, my client's Roth conversion is not included in modified adjusted gross income and references publication 590.  First, I can only find publication 590-A and 590-B.  I can't find this rule in either publication.  Can anyone point me to the right direction? Thanks.

[Terry53029]

From 26 CFR: see link: https://www.law.cornell.edu/cfr/text/26/1.408A-4

A-7. (a) Any amount that is converted to a Roth IRA is includible in gross income as a distribution according to the rules of section 408(d)(1) and (2) for the taxable year in which the amount is distributed or transferred from the traditional IRA. Thus, any portion of the distribution or transfer that is treated as a return of basis under section 408(d)(1) and (2) is not includible in gross income as a result of the conversion.

[George4Tacks]

For this old mind, I need more information. How much regular IRA deduction for the year? How much Roth Conversion for the year. What is AGI without any of this? Is there an IRA basis for the prior year?
I have always found Lacerte does an excellent job when it is given the correct information. Share that info with us (in round numbers) and we may be able to help you get on the right side of this disagreement.

[maughact]

AGI on 1040 is $331,673, Roth conversion amount $241,608, IRA contribution $14,000.  Lacerte allowed the $14,000 deduction and worksheet points to publication 590 for not including the conversion in the calculation of MAGI.  I know it's strange that they converted to a Roth and then made the contribution to the IRA.  I think they decided to do that once they found out how much the conversion cost them.  I believe that Lacerte is wrong and just very surprised that their calculation was not correct.

[TaxGuyBill]

I don't see any indication that income from a taxable conversion would be subtracted from MAGI.

https://www.irs.gov/publications/p590a#en_US_2020_publink1000230489

(1) Was the Roth conversion taxable?  And is the taxable amount the only portion that is added to AGI/MAGI?

(2) Double check that you entered the conversion correctly.

(3) Does the Lacerte IRA Deduction Worksheet show how MAGI is calculated, or does it just show "MAGI" and you manually calculated MAGI to verify the numbers?  If it shows the calculation, could you post a picture of it here (be SURE it does not show any private information about your client)?

[TaxGuyBill]

We were posting at the same time.   LOL.

Your last comment seems to say that "Lacerte allowed the deduction".  What about other conditions, such as being covered by an employer plan?  Did you properly indicate the taxpayer and/or spouse is covered by an employer plan?  If you missed that, that is likely why Lacerte would not limit the deduction.

[maughact]

Yes, the worksheet on line 3 has 3 ***, then at the bottom of the worksheet it points to publication 590.

There are also worksheets titled "form 8606, worksheet to figure taxable part of the distribution to include in MAGI for IRA deduction worksheet (Pub 590).

I handled the conversion correctly, it's reported on form 8606.  There are no diagnostics.

[maughact]

I agree, I'm just curious why Lacerte has 3 different worksheets trying to prove the deduction,  the regular IRA deduction worksheet, the social security worksheet for the amount to include in MAGI and then form 8606, worksheet to figure taxable part of the distribution to include in MAGI for IRA deduction worksheet (Pub 590).

There is also a SEP deduction of around $4,000 and Lacerte worksheet indicates participant in employer plan.

[maughact]

The taxpayer also has a SEP deduction and Lacerte properly shows him as being in an employer plan.

[rbynaker]

The reference to Pub 590 (which clearly needs to be updated by Lacerte, it's been several years now since the IRS split 590 into A and B) is likely a reference to Pub 590-B Worksheet 1-1 (page 17 of the 2020 Pub).

https://www.irs.gov/pub/irs-pdf/p590b.pdf

It's referenced on page 15 under "Contribution and distribution in the same year."  When I've run into these there's been a lot of jumping back and forth between the 1040, the Pub and the 8606.  I know ProSeries data entry is quirky on this and you have to make sure you enter everything in the right boxes for the math to come out correctly.  I seem to recall for at least one of the worksheets there was an important distinction between a 2020 IRA contribution made before 12/31/20 (therefore included in the 12/31/20 FMV) and one made for 2020 in 2021 by 4/15 (not included in the 12/31/20 FMV).  I would guess Lacerte is also particular about what needs to be entered where to get everything in the right place on the forms/worksheets.

Any time I don't like what I'm getting out of the software I go back to paper forms and worksheets and work through the calculations by hand.  Then you should be able to identify a particular box/line that derailed you and try to figure out what the software wants you to do.

Beyond that, great info from Bill (as usual).  I don't know of anything that would subtract Roth conversion income from AGI to determine MAGI for IRA contribution deduction purposes.

As you work through the worksheets, pay close attention to where the basis goes for the non-deductible contribution.  Does it stay with the "new" IRA or does part of it get allocated to the Roth Conversion income?  (Effectively moving your IRA deduction from Schedule 1 Line 19 to the 1040 Line 4b, which may have little effect on your Taxable Income.)  Not enough data for me to dig into the details but this may be a case where the IRS is adjusting S1-L19 and you need to convince them to make an adjustment in the opposite direction to 1040-L4b.

Rick

[maughact]

Just got off phone with Lacerte and worksheets are not correct 😞

IRS is correct.