Figuring taxable Social Security with IRA contribution

[kdgne]

My spouse receives Social Security and I am self-employed, and we both took IRA distributions for 2021. I plan to contribute to my IRA for 2021 based on my self-employment income (at the prompting of TurboTax). When I add in my IRA contribution, TT now calculates the taxable portion of the Social Security income using the "Social Security Recipients Who Contribute to a Traditional IRA Worksheet". However, I can't figure out where it is getting the number for the Modified AGI used in line 1 of Worksheet 1, "Computation of Modified AGI". It looks like it should be from IRS Pub 590-A (Appendix B & C) but if I follow the instructions in Appendix C of that publication, I get a much higher number. 

When I go to Forms and ask for the data source, I get the following popup:

"Generally, the amount on line 1 will be the amount shown on line 38 of Form 1040 not including any social security benefits, the series EE bond interest exclusion from Form 8815, excluded adoption benefits from Form 8839, the deduction for student loan interest, the domestic production activities deduction, or any traditional IRA deduction. However, if the taxpayer or the spouse also received a distribution from a traditional IRA, a special calculation is made to determine the amount on this line and may not agree with the amount on line 38 of Form 1040."

The reference to line 38 of Form 1040 seems to be for a previous year. But I am wondering what is this "special calculation"?  Is there a way to check the numbers?

[DaveF1006]

Actually the number from Line 1 Worksheet 1 should be from line 11 of the 1040. The reference to line 38 should not appear so ignore that number. See if line 11 agrees with line 1 Worksheet 1 in Appendix C and line 1 in Appendix B. Also verify if  line 8 in Appendix C agrees with line 1 Worksheet 3 in Appendix B.

[kdgne]

Thanks for your reply. That is actually the problem -- line 11 from form 1040 does not agree with line 1 in Worksheet 1 of the "IRA SS Wks" in TurboTax, which is adapted from Appendix B of 590-A. The data source is supposed to be the worksheet from Appendix C, but this is not shown in TurboTax so I can't see how that calculation is done. It is supposed to take line 11 and subtract a few simple things -- in my case, Social Security and the IRA deduction itself. But when I do this computation manually by filling out the worksheet in Appendix C, I get a much different number. In my case I have also taken an IRA distribution so I apparently fall into the "special calculation" handling mentioned in the data source pop-up, but I can't figure out what that calculation might be and I can't seem to find it anywhere in TT.

(I've also tried printing out the pdf with all supporting records and searching for that number, but it doesn't show up anywhere except this one line item in the IRA SS Worksheet.)

[RaifH]

Your modified AGI should be the AGI reported on Line 11 minus your social security benefits plus your IRA deduction, student loan interest deduction etc. You are trying to get to your AGI without taking into account any IRA deduction, any student loan interest deduction, any social security benefits from Form SSA-1099 or RRB-1099, or any exclusion of interest from savings bonds to be reported on Form 8815.

The IRS worksheet seems to have you subtract all these numbers in Appendix C, which I think must be a misprint. If your AGI would have been 20,000 before taking a 6,000 IRA deduction then your AGI becomes 14,000. If you want to go back to the pre-IRA deduction AGI, you would need to add the deduction back, not subtract it again. 

Try running it that way and see if you come up with the same modified AGI that TurboTax produced.

[kdgne]

Thanks for your reply. Yes, I have done that calculation manually with and without the IRA deduction subtracted, and in every case the number I come up with is QUITE different than what TurboTax is coming up with (my number is quite a bit higher). I cannot figure out how that calculation is being done by TT behind the scenes, as it seems much too low. When I right-click on "data source" for that number in the worksheet, the popup says:

"However, if the taxpayer or the spouse also received a distribution from a traditional IRA, a special calculation is made to determine the amount on this line and may not agree with the amount on line 38 [line 11] of Form 1040"

This is exactly my situation, as I also have received a distribution from a traditional IRA while I am also trying to contribute to the IRA for 2021. So I am wondering what "special calculation" is made, as it is not shown anywhere in TT and it is clearly NOT the calculation described in Appendix C, with or without the IRA contribution deduction.

It seems to me that this might be a bug in TT because the number it comes up with is MUCH lower than the number I come up with by following the instructions for the Pub 590-A calculation. [Note that where the popup references line 38 of Form 1040, it obviously means line 11 of the 2021 Form 1040.]

[RaifH]

Line 1 on Worksheet 1 to determine adjusted gross income for social security recipients is calculated this way:

   Adjusted Gross Income from Form 1040 Line 11

-  Taxable social security from Form 1040 Line 6b

+  IRA Deduction from Schedule 1 Line 20

+  Student Loan Interest deduction from Schedule 1 Line 21

-  Excluded adoption benefits included in wages, excluded savings bond interest used to pay for education and other rare adjustments that probably don't apply.

This number, only with the IRA deduction removed, is then used on Worksheet 3 to determine the taxable social security benefits.

[kdgne]

Thanks, yes that is fairly clear from the IRS Pub. (I am not sure what you mean by "rare adjustments that probably don't apply"? But I believe I have no line items from that list except for SS and the IRA contribution.) However TT is adjusting the number downward an additional large amount which I can't account for. By adjusting the modified AGI number further downward, TT calculates that our taxable SS decreases by more than twice the amount of my small IRA contribution, which seems questionable.

According to the TT "data source" help text for the Modified AGI on Worksheet 1 Line 1, it is using some other "special calculation" based on the fact that I also received an IRA distribution. It is not clear what that other calculation is but it is not the one you just described, and TT is not showing its work. My question is, where can I see the calculation TT is making? Or is this a bug?

(Perhaps I should have made the subject of my message "Figuring taxable Social Security with IRA contribution and IRA distribution" so my question would have been clearer...)

[RaifH]

Maybe if I take a look at your entire tax return, I can determine how this number is being calculated for you. To do that, I would need a TurboTax ".tax2021" file.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

Go to the Online menu at the top of the screen and select Send Tax File to Agent. 

1. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
2. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return. 

[kdgne]

Thank you, I have sent the file. The token number is 963578.

[RaifH]

Thank you for providing that. I've taken a look, and it seems to me that two of the retirement distributions are not being taken into account in calculating the AGI on that worksheet. I'm not sure why, unfortunately since some of the information is hidden from me I can't see who is getting these distributions or where they are from, but nothing in your answers would indicate any reason they should not be computed with your AGI.

My suggestion is to re-enter these two and see if the AGI calculates correctly. If you imported them before, try typing them in manually. They are the $11,382.36 distribution with Code 2 and the $520.94 distribution with Code 4. Please see if that resolves the error. At that point, the AGI on line 1 of that worksheet should be the Form 1040 Line 11 - Form 1040 Line 6b + Schedule 1 Line 20

[kdgne]

I apologize for the delay in my response. I re-entered all of our 1099-R's by hand and the number comes out the same. However I did notice that as soon as I entered the final 1099-R, which was for an inherited IRA annuity, that is when our Modified AGI in Worksheets 1&3 went down significantly. If I change it to not be inherited, the Modified AGI goes back up. So I suspect that the Modified AGI calculation is not counting the inherited IRA annuity distribution, or part of that distribution, as income. Can that be correct?

[kdgne]

Wondering if anyone has a suggestion for what I should do next here? It seems like I should override the MAGI since TurboTax must be calculating it incorrectly? Or how can I find out for certain that the TT calculation is wrong? Any help appreciated!!

[RaifH · Accepted solution]

There is no reason the inherited IRAs should be treated any differently than your other retirement distributions for calculating the modified AGI to determine the amount of your social security that is taxable. If deleting and re-entering your 1099-Rs did not help, you can override the Modified AGI on Worksheet 1 to accurately reflect all your retirement distributions.  Once you change that number, 85% of your wife's social security benefits should be taxable, rather than the slightly reduced amount that is now being reported.