IRA Contribution - Types of Deductions / Benefits

Question

Taxpayer X (Married Filing Jointly) has an AGI of $244k. This income includes W-2, 1099-R, 8949 sale of a second residence, and social security income.

When I am going through the tax return, I am determining if a traditional IRA is fully deductible. The husband participated in a retirement plan at work in 2020, so that limits the spouse's contribution based on this table:

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines

What's very odd is when I enter the $7k traditional IRA contribution for the spouse, it is not coming through on line 10 as an adjustment to income in ProSeries, which I expect, since the taxpayer is above the MAGI.

However, it appears to be reducing the 1099-R IRA distributions that I am have on line 4a of the 1040.

Some of the 1099-R received have Code P, "Return of Contribution Taxable in 2019."

Is it possible that an IRA contribution can reduce/offset certain IRA distributions? In other words, the taxpayer is not getting the more conventional IRA deduction but is instead being allowed (for some reason I still don't understand) to offset IRA distributions that contain a certain code.

ProSeries is reducing the overall tax liability when I enter the IRA contribution despite being over the income limit.

The other thought is the consideration of the IRA with regards to the income type, meaning MAGI needs to account for sale of the home (i.e. it is not part of the income limit since it is not regular income).

qbteachmt · Answer

Oh, this is a lot of intertwined stuff that doesn't need to be so hard.

"When I am going through the tax return, I am determining if a traditional IRA is fully deductible."

Why not let the program do this part?

https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

"meaning MAGI needs to account for sale of the home (i.e. it is not part of the income limit since it is not regular income)."

Did you mean "earnings" or "compensation?" Not all of your list of sources of income are taxable compensation as earnings, even though they might result in taxable income. All of this is needed for the IRA contribution analysis. Since you mention $7k for the spouse, I would assume the nonworking spouse is over 50. And that the W2 has a gross of at least $7k.

You mention AGI of $244k.

https://www.investopedia.com/terms/m/magi.asp

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

"when I enter the $7k traditional IRA contribution for the spouse, it is not coming through on line 10 as an adjustment to income in ProSeries, which I expect, since the taxpayer is above the MAGI."

Line 19 would be IRA. You should have an IRA worksheet and likely will have a Form 8606.

"Some of the 1099-R received have Code P, "Return of Contribution Taxable in 2019.""

"Some?" What was filed on the 2019 1040? Did they make a corrective distribution by taking out funds in 2020 that were put into a Traditional IRA as 2019 money, but it turned out to be an error? This seems like "some" were excess contribution(s). Was this corrected before filing 2019? Or, later in 2020?

"ProSeries is reducing the overall tax liability when I enter the IRA contribution despite being over the income limit."

Are you properly marking T/S for these activities?

Are you trying to make a spousal contribution and spouse has one or more of these 1099-R? You never stated who these "some" 1099-R belong to.

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