May an unemployed spouse make a before tax IRA contribution from their pension, Turbo tax allowed it but IRS says no, Please help?

[Anonymous]

Step-by-Step in turbo tax does not count the IRA contribution as taxable, therefore reducing the taxable amount by the amount that spouse made as an IRA contribution. IRS sends a notice that we didn't use the full taxable amount in box 2a of 1099-R, because Turbo Tax deducted the amount used for an IRA contribution. Please help.

[VolvoGirl]

You have to pay the tax on the pension first.  Then if you qualify for a IRA deduction based on your spouse's earned income you enter it under Deductions & Credits.  When you entered the 1099R for the pension did you say you put it in an IRA?  That would be wrong.  You can't roll your pension into a IRA.  The pension and IRA contribution are two separate entries.  @dmertz

[dmertz]

I think VolvoGirl's guess is probably correct, that you inappropriately reported a portion of your pension payment as having been "rolled over" to an IRA.  No such rollover of a pension payment is permitted.  Even if you used the money to fund an IRA contribution, the IRA contribution is a new, regular contribution, not a rollover.

[Anonymous]

Wow, thanks for your quick response. Turbo Tax Step by Step asked what did you do with the money, and we answered used a part of it for IRA contribution, and Turbo Tax did not count the amount contributed as taxable anymore, and we got and IRA deduction as well. Is that double dipping, and why did Turbo Tax allow it? Thanks  again!

[VolvoGirl]

Yes you double dipped.

[dmertz · Accepted solution]

TurboTax has no way to know if the Form 1099-R for your pension distribution represents a distribution that is eligible for rollover or not because the Form 1099-R doesn't indicate whether the distribution is rollover eligible.  For example, a distribution from a 401(k) would be rollover-eligible and would be reported identically on a Form 1099-R.  TurboTax relies on you to only report rollovers that were actually made and were eligible to be made.

The IRS also receives the Form 5498 issued by your IRA custodian indicating whether you made regular or rollover contributions.  In this case, the IRS recognized from the Form 5498 that you actually made a new contribution, not a rollover contribution, so they allowed the IRA deduction on Form 1040 line 32 or Form 1040A line 17, but disallowed the exclusion of this portion of the pension distribution from Form 1040 line 16b or Form 1040A line 12b.

If your state taxes this pension income, you'll likely need to amend your state tax return to make the correction there as well.