Allowed Roth contribution against Schedule C net earnings

[Sally Gal]

We always avoid income taxes on Schedule C net earnings (about $5000) by claiming the maximum self-employed healthcare deduction against the Schedule C net profit.   In years past, this has prevented us from making a Roth contribution, since we have no other earning income.

However, this year TurboTax seems to allow the Roth contribution and even calculates the maximum amount for both of us, equal to half of the earnings.  Since I have been very disappointed with TurboTax this year, I am suspect of this advice.  Can someone confirm?

[dmertz · Accepted solution]

It seems that you have been unnecessarily giving up your opportunity in previous years to make Roth IRA contributions.  Only deductible retirement contributions reduce the amount of net earnings available to apply to a self-employed health insurance deduction and Roth IRA contributions are not deductible.  What matters is that the sum of the deductible portion of self-employment taxes, the deduction for self-employed retirement savings and the deduction for self-employed health insurance is not permitted to exceed net profit from self-employment.  This means that you can contribute to a Roth IRA at least as much as your self-employed health insurance deduction unless otherwise limited by the normal Roth IRA contribution limitations.

With regard to this, nothing has changed in TurboTax for many years.

[Sally Gal]

Thank you for replying!

I did actually figure this out myself a few hours ago, to my dismay.   I reviewed our return for 2013 and saw that we each contributed 6500 to a Roth and took a 9000 self-employed health insurance deduction when the Sch. C earnings (less 1/2 SE tax) were only ~17000.

I clearly recall (clearly mistakenly) more than once trying to get TurboTax to approve Roth contributions with the insurance deduction, and TurboTax complaining--maybe I didn't make clear it was a Roth we wanted to contribute to.  Sad!

Thank you for your time.