Unexpected IRA Deduction

[tkenbo]

Hello, I need a help.

I'm working on 2024 tax report and got stumbled on IRA deduction section.

I'm getting deductible IRA of $3420 even though all my contributions should be non-deductible IRA.

I used to exceed MAGI and had to do backdoor Roth conversion, so my broker had set up my wife's account to do Roth conversion right after contribution is made to Traditional IRA in order to avoid tax consequences.

She contributed total of $9508 reported in 2024 1099-R.

Among the total, $1508 was the total basis for 2023, which was reported in 2023 8606.

She contributed $8000 by 2024/12/31 (She is 50yrs) and all the contributions are immediately converted to Roth, so Traditional IRA balance at 2024/12/31 is $0.

Yet, Turbotax reports I have $3420 IRA deduction.

I don't know what I did wrong or where $3420 came from....

Please help....

[dmertz · Accepted solution]

It appears that your MAGI for the purpose of a deduction for your your wife's traditional IRA contribution is in the phase-out range for a deduction for a traditional IRA contribution.  (If your wife is not covered by a workplace retirement plan, the phase-out range for deductibility of a traditional IRA contribution is higher than your own phase-out range).

Because all of your wife's traditional IRA funds were converted to Roth, it doesn't matter whether any part of her contribution is treated as deductible or not.  The portion treated as deductible simply increases that taxable amount of the Roth conversion by an equal amount.  The increase in the taxable amount is offset by the deduction, resulting in the same AGI that you would have if the contribution was treated as entirely nondeductible.

[tkenbo]

Thank you dmertz for your quick advice.

I checked the 2024 deduction limit and realized that that's where $3420 came from.

My wife is not covered by workplace plan but I am.

So we only get a partial deduction of $3420 for the traditional IRA.

I now realize that's what Turbotax was telling me.

But as you said this doesn't matter as total taxable amount gets increased by the amount anyways and it won't change total taxable amount and I can move on without any action or correction.

Please let me know if I'm still mistaken.

[dmertz]

I agree.