IRA contribution error

[Patrick8848]

All my income is passive but TT says I can contribute the maximum amount to an IRA. This appears to be a bug. Please explain.

Also I had a much larger than normal withdrawal from my investment and retirement account in 2022 and TT calculated my estimated tax for 2023 based upon the exceptional 2022 year. There doesn't appear to be any way to set my own estimated tax. Why not?

[MonikaK1]

To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Compensation for purposes of contributing to an IRA doesn't include earnings and profits from property, such as rental income, interest, and dividend income, or any amount received as pension or annuity income, or as deferred compensation. In certain cases, other amounts may be treated as compensation for purposes of contributing to an IRA, including certain alimony and separate maintenance payments received, certain amounts received to aid in the pursuit of graduate and postdoctoral studies, and certain difficulty of care payments received.

See IRS Publication 590-A for more information on IRA requirements.

There are a number of tools you can use to calculate your estimated taxes for 2023.

TurboTax's TaxCaster is available without opening your return and will estimate your total taxes for 2023. This will help you determine the amount you should pay each quarter. See the discussion in this thread for more information.

When you prepare your 2022 return, TurboTax will automatically calculate your 2023 estimated tax payments and prepare 1040-ES vouchers if the program determines that you may be at risk for an underpayment penalty next year.

You can also calculate your 2023 estimated taxes and generate the payment vouchers by following the steps below. You will need to wait until your filed return is processed (payment acknowledged / refund received) before reentering your return. See here for the process to open/amend a return that has been filed.

To calculate estimated taxes and prepare Forms 1040-ES:

1. With your tax return open, search for 1040-es (be sure to include the dash) and select the Jump to link
2. Answer No to the question Do you want to change your W-4 withholdings for 2023?
3. Answer the questions about things like your 2023 filing status, income, and deductions
4. Eventually, you'll come to the Print Vouchers? screen. Answer Yes and we'll include your 2023 1040-ES payment vouchers when you print a copy of your return later

You can also use the IRS Withholding Estimator to calculate amounts to be withheld from wages.

[DonPayne]

@MonikaK1 

1. OP is reporting a bug in TT. I see the same bug. I have Home & Business, Desktop, Windows, for 2022, married filing jointly.

Under Personal > Federal Review:
> "We found a way you can plan for retirement and get a tax break" > click Continue
> "Here's how a traditional IRA could get you a tax break" > click Continue
> "Let's see how big your tax break can be"

My spouse had < $7,000 in earned income ("taxable compensation") in 2022. However, I was able to enter $7,000 for my spouse (over 50); then clicked the Calculate button.  The calculator claimed that the full $7,000 was deductible and would save us $thousands in taxes. 

I believe that's incorrect.

https://www.irs.gov/retirement-plans/traditional-and-roth-iras :

"The most you can contribute to all of your traditional and Roth IRAs is the smaller of: [...]

For 2022, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.

IRS Publications 590a 2022: What is compensation? :

"Wages, salaries, etc.

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation."

2. TT can help you estimate income tax for the next year (2023) in the program. Go to Personal > Other Tax Situations > Other Tax Forms > "Form W-4 and estimated taxes". It asks you to estimate your income & expenses, then estimates your tax bill.

[MonikaK1]

Depending on how you answered the questions in TurboTax, your spouse may be able to contribute up to the limit even if her earned income was less.

If you file a joint return, you may be able to contribute to an IRA even if you didn’t have taxable compensation as long as your spouse did. Each spouse can make a contribution up to the current limit; however, the total of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the Kay Bailey Hutchison Spousal IRA Limit in Publication 590-A.

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.