TurboTax says my wife's IRA contribution is too high, seems wrong

[MikLamb]

I am retired, having no earned income in 2024, and my wife earned $3600.00 from a self-employed consulting job. I have contributed all of that income to her regular IRA, but TurboTax is saying that a $3600 IRA contribution is too high, that only $3346 is allowed as a contribution based on her earned income, and that we will have an excess contribution and a penalty if we don't withdraw the excess of $254.  Why would that be? I thought $7000 was allowed (we are both over 60).

[VolvoGirl · Accepted solution]

That's right.   If you have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for the ER portion of your self-employment taxes. The 1/2 SE Tax amount will be on Schedule 1 line 15 which goes to 1040 line 10.

See IRS publication 590A page 6 about self employment income (it applies to both Traditional and ROTH IRAs)
https://www.irs.gov/pub/irs-pdf/p590a.pdf

[MikLamb]

Thank you!

[Opus 17]

Your maximum contributions are $7000 per person ($8000 if over age 50), or your compensation from working, whichever is less.  

Because of the different way social security and medicare tax is calculated for self-employer people vs. employees, your wife's compensation is her net profit (income minus expenses), minus an adjustment for self-employment tax.  

[dmertz]

VolvoGirl is correct.  $254 is the deductible portion of SE tax that cannot be used to support an IRA contribution.  That leaves only $3,346 available to support IRA contributions.