Why am I being penalized for over-contribution to my Roth IRA when my AGI is below $124,000 on my 1040?

[nikkiadams2001-y]

I earned unemployment and with that plus my W2 wages, I was over the $124,000.  But with the new stimulus bill, up to $10,200 is exempt from Federal tax.  So my AGI is under $124,000, but when I add my Roth IRA contribution, it tells me that my MAGI (which is the same as my AGI) is over $124,000 and I'm having to pay tax on the amount above $124K, but my MAGI is not above $124K.  I should be allowed the entire Roth contribution limit with no penalty.  How do I fix my return so I am not penalized?

[ThomasM125]

Your IRA contribution is limited by your Modified Adjusted Gross Income (MAGI), which is your adjusted gross income plus or minus certain adjustments. Although the IRS has recently allowed you to exclude up to $10,200 of unemployment compensation for taxable income purposes, it is not clear that they included in that regulation to also exclude the unemployment income for MAGI purposes.

So for now, it seems the exclusion of the unemployment for taxable income purposes does not extent to income for the limit on IRA contributions.

[dmertz]

TurboTax is behaving correctly.  Section 9042(b)(5) of The American Rescue Plan Act of 2021 requires the calculation of MAGI for this purpose to add back the exclusion for unemployment benefits.