IRA earned income limit - two self-employed businesses

[sockfight]

My wife and I are each self-employed. We file two Schedule Cs with our return (married filing jointly), one for her business, one for mine. If my business had a net profit of $3,000 and hers had a net loss of $1,000, and assuming no other earned income, what is the limit for an IRA contribution? Is it $2,000 ($3,000 profit minus $1,000 loss) or is it $3,000 (profit from my business, disregarding her loss)?

Thank you

[ColeenD3 · Accepted solution]

Neither your businesses nor your IRAs are combined for any purposes. You can contribute based on your income. She can't contribute as she had no income.

[dmertz]

Assuming no other compensation, your combined IRA contributions cannot exceed your net profit minus the deductible portion of self-employment taxes.  For a net profit of exactly $3,000, that would be $2,788.  Because your wife has no compensation, an IRA contribution made by her is permissible and would be a spousal contribution based on your compensation.  In other words, your maximum contribution is $2,788 and your wife's maximum contribution is $2,788 minus your contribution.

[sockfight]

Thank you, and I appreciate you mentioning the nuances of 1/2 SE tax. Also, it turns out that TurboTax reveals the answer, just not where you expect it to: In the deductions section, it asks if you've made an IRA contribution but doesn't suggest what your limits are. But later in the review section, it points out you could get a deduction by making a (traditional) IRA contribution and spells out exactly what the allowed amount is.

[ColeenD3]

Kay Bailey Hutchison Spousal IRA Limit

For 2021, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts.

$6,000 ($7,000 if you are age 50 or older).

The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.

Your spouse's IRA contribution for the year to a traditional IRA.

Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $12,000 ($13,000 if only one of you is age 50 or older, or $14,000 if both of you are age 50 or older).

Note.

This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

Example.

Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither of them was age 50 by the end of 2021. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $6,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $6,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution ($30,000 − $6,000 = $24,000), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $6,000 is her contribution limit, because $6,000 is less than $24,000 (her compensation for purposes of figuring her contribution limit).