1099-G (Federal grants) income from a postdoctoral fellowship contribute towards IRA income limits in 2020?

[angmi90]

I am a post-doctoral fellow paid not through a W2 but rather a 1099-G where I earn grant income that is reported on box 6 of the 1099-G. I pay estimated quarterly taxes each year to avoid the underpayment penalty to both IRS and to the state. However, when I input this into TurboTax, it always says I have made excess contributions to my IRA as it shows my eligible income is $0, which is incorrect and makes any contribution to my IRA in excess.

According to the new tax law that went into effect for 2020 (https://www.law.cornell.edu/uscode/text/26/219) see (F) (1) Compensation: ...."The term compensation shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study."

This means that the software needs to include 1099-G box 6 income earned as a result from a graduate or post-doctoral study as part of an individual's gross income that would count towards an IRA income contribution limit. Am I reading this correctly?

[Bsch4477]

Just reread your reference.  Good catch.  Hopefully TurboTax will include this change in its program. If not, post again and we will try to help you. 

[Critter-3]

The program is still being updated for all the new rules and until it is fully functional sometime in late January or sometime in February there is no way to get this to work yet.  

[Opus 17]

That's an interesting change in the law.  Postdoc stipends are not "earned income" because you are not being paid for performing "work" (regardless of what it feels like when the alarm goes off Monday morning), you are being trained and educated.  This means you are not subject to self-employment tax (social security and medicare).  Normally this also means you don't have "compensation" for purposes of contributing to an IRA, but you are correct the tax code now allows postdoc stipends to be considered "compensation" for purposes of an IRA.

In that case I would suspect that the program has not been fully updated for all new tax law changes.  Try again in January.  Note that Turbotax can only post changes once the IRS had made the changes to their forms and instructions, and then it usually takes a few more weeks since the IRS also has to specifically approve of the change in the tax program.  Sometimes, tax law changes are not approved until February or even March. 

[Critter-3]

I wonder if the new 1099-G will have a different code  or you will get a 1099-misc instead ... wait for the form you will get in January ... only then will we know the path that is needed.  

[Opus 17]

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@Critter-3 wrote:

I wonder if the new 1099-G will have a different code  or you will get a 1099-misc instead ... wait for the form you will get in January ... only then will we know the path that is needed.  

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Box 6 is already "taxable grants."  The question I suppose is whether the question "Is this the kind of taxable grant that qualifies as compensation under the new §219?" is going to be for the government payor to determine (which would need a new box) or for the taxpayer to certify for themselves.). The 2021 1099-G is already released so my guess is the latter.

My guess is, when making an IRA contribution without earned income, Turbotax should look for a 1099-G box 6 and ask the taxpayer "was this payment for graduate student or postdoctoral training, or some other kind of grant?"  Alternatively, this may require an override if it is one of those things where the IRS says "attach a written statement".  I think we just have to wait to see how it is implemented. 

[macuser_22]

Typically TurboTax uses the IRS Pub that interrupt the tax laws and the IRS forms and instructions.  directions for those forms.   This is explained in 2020 IRS Pub 590A that has not published yet.   The draft 590A says:

Under "What is Compensation"

Certain taxable non-tuition fellowship and stipends.
For tax years beginning after December 31, 2019, certain
taxable non-tuition fellowship and stipend payments are
treated as compensation for the purpose of IRA contributions.
Compensation will include any amount included in
your gross income and paid to aid in your pursuit of graduate
or postdoctoral study.

So I am sure that when complete, TurboTax will follow those rules.

[Opus 17]

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@macuser_22 wrote:

Typically TurboTax uses the IRS Pub that interrupt the tax laws and the IRS forms and instructions.  directions for those forms.   This is explained in 2020 IRS Pub 590A that has not published yet.   The draft 590A says:

Under "What is Compensation"

Certain taxable non-tuition fellowship and stipends.
For tax years beginning after December 31, 2019, certain
taxable non-tuition fellowship and stipend payments are
treated as compensation for the purpose of IRA contributions.
Compensation will include any amount included in
your gross income and paid to aid in your pursuit of graduate
or postdoctoral study.

So I am sure that when complete, TurboTax will follow those rules.

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Yes, but the problem is that not all box 6 "taxable grant" payments will qualify as graduate student or postdoctoral stipends, so the question will have to be asked at some point. 

[angmi90]

So I have purchased the TurboTax 2020 software to do my taxes and as of Feb 4, 2021, this has not been fixed. How long should I wait to allow them to push an update to the software? Or how can I contact someone at Intuit to make them aware of this?

[Opus 17]

Publication 590A is still in draft for 2020.  I can ask a moderator about this, if there is sufficient demand, they may create a FAQ.

[SamS1]

Try forcing it through the 1098E American Opportunity Credit screens.  You will need to enter zeros for expenses and tuition except for the information about the Grants and Fellowships.  Enter the amount from your 1099G there.  This should push the amount to your wages line of the 1040 and hopefully get you around the IRA contribution limit errors.

[Opus 17]

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@SamS1 wrote:

Try forcing it through the 1098E American Opportunity Credit screens.  You will need to enter zeros for expenses and tuition except for the information about the Grants and Fellowships.  Enter the amount from your 1099G there.  This should push the amount to your wages line of the 1040 and hopefully get you around the IRA contribution limit errors.

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If Turbotax does not yet recognize that certain fellowship income is "Earned" for purposes of IRA contributions, how will this accomplish that?  Entering a fellowship in the 1098-T interview will simply add it to line 1 with the notation "SCH", that's not normally earned income, and would not be earned income if it was, for example, an undergraduate scholarship awarding tuition and room and board.  The law only changes the tax treatment of Graduate Student and Postdoctoral Fellow stipends that meet certain requirements. 

[Opus 17]

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@angmi90 wrote:

So I have purchased the TurboTax 2020 software to do my taxes and as of Feb 4, 2021, this has not been fixed. How long should I wait to allow them to push an update to the software? Or how can I contact someone at Intuit to make them aware of this?

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The moderators have confirmed that Turbotax is aware of the issue but is awaiting final guidance and instructions from the IRS.  There is no timetable on when this will be updated.  

[nmn38]

Do you have a new estimate on when this change will be updated in the TurboTax system? Or when the IRS will approve the final 590-a document? I have a similar issue as the person who originally posted this question and am getting nervous that it is already March and the change isn't accounted for.

[CarissaM]

@nmn38 Can you provide a little more clarity as to what kind of assistance you are needing?