Contribution into traditional IRA

[lexdoh01]

When I enter my IRA contributions for my 2020 return for my wife and I, our tax due goes up, not down. We both turned 70 in 2020. We have not taken any IRA distributions, even though we were 70 1/2 in 2020 due to the COVID measure passed that allows us to wait until age 72 to take a minimum distribution. The measure also allows contributions into an IRA to continue past age 70 1/2. What am I misunderstanding? Why does my tax liability go up when I enter our 2020 contributions (made between 1/1/21 and 4/15/21) when entered into Turbotax?

[VolvoGirl]

Do you both have earned income from W2 wages or a Net Profit from self employment income?  Otherwise it's an excess contribution.  Be sure each contribution and income is assigned to the right spouse.

[lexdoh01]

We have no W2 income or net profit from self employment income. We just have social security income and investment income. 

[macuser_22 · Accepted solution]

The tax goes up because the is a 6% penalty for excess IRA contributions that repeat  every year until removed.     To remove the penalty  the excesses plus any earnings must be removed before the Apr 15 filing date.

Only taxable compensation is eligible fro IRA contributions.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2020_publink1000230355

[VolvoGirl]

Then you can not make any contributions.  You will have to remove the money from your IRA accounts.  Then I don't know if you leave it off your return or how it works.  @dmertz 

[lexdoh01]

Thank you very much. I now understand my situation.

[lexdoh01]

Thanks for your assistance on this.