Solo401contributions (ee and er contribution) and tax deductible traditional ira contribution

[Tr221]

I need your comments on this as i got a billing notice for disallowed self employment tax deduction:

From 2023 TurboTax filing, my net income from sh C is 188536.

I had $35,216 as ER contribution, $22,500 as EE contribution and $7500 catchup contribution in my solo 401k for a total of $65216, which well below the 73,500 maximum contribution allow so i contributed $7500 for myself and $7500 for my non-working spouse to traditional ira, still below the maximum contribution allow.

Now IRS, told me that $15,000 traditional ira contributions were not allowed. This is the reason as IRS stated:

” we did not allow the amount claimed as a deduction for self-employed SEP, SIMPLE, and qualified plans on your tax return. Your employer has already adjusted Box 1 of your Form W-2 to exclude this amount”

I no W-2 form nor W-2 wages reported on my 2023 1040 tax return.

What IRS meant and is it correct to disallow this traditional ira contribution ?

please advise.

[dmertz]

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@Tr221 wrote:

Now IRS, told me that $15,000 traditional ira contributions were not allowed. This is the reason as IRS stated:

” we did not allow the amount claimed as a deduction for self-employed SEP, SIMPLE, and qualified plans on your tax return. Your employer has already adjusted Box 1 of your Form W-2 to exclude this amount”

This statement doesn't make sense.  The $15,000 of IRA contributions and the solo 401(k) contributions are separate things.  With $188,536 of net profit from self-employment, these contributions are certainly allowed.  However, if your modified AGI for the purpose was over $136,000, your traditional IRA contribution (and your spouse's contribution if your spouse is covered by a workplace retirement plan) was not deductible.  If your spouse was not covered by a workplace retirement plan and MAGI was over $228,000 in 2023, your spouse's traditional IRA contribution was not deductible.  Nondeductible IRA contributions are required to be reported on Form 8606 Part I.

This seems to be an error made by the IRS.  You'll need to address it with them.  It makes no sense that they would mention anything about a W-2 if you received no W-2, which should be apparent to the IRS.  It seems that you made the correct entries into TurboTax and TurboTax would have produced a correct tax return with respect to these contributions.

[Tr221]

Thank you for your informative reply, Dmertz

Our modified AGI is 264,020. I am 100% retired so no wages. My spouse is an independent contractor with no benefits, no pension, no retirement plan from her ER… she received only form 1099-NEC: on the 1099-NEC form, besides payer’s, and recipient’s name, address,TIN number, her wages is listed on BOX 1 non-employee compensation, all other boxes are blank.

Regarding AGI limit on tax deductible traditional IRA, why TurboTax allowed us to adjust our income as showed on Schedule 1, Part II, line 20: 15000.

 Best regards

[Tr221]

 

This is from IRS website:
Traditional IRAs

• Retirement plan at work: Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels.
• No retirement plan at work: Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.

do you think my spouse’s solo 401k with EE,ER contributions is considered as “covered by a retirement plan at work” per IRS ?

[dmertz]

"do you think my spouse’s solo 401k with EE,ER contributions is considered as “covered by a retirement plan at work” per IRS ?"

Yes, contributions for the year to a solo 401(k) make that person covered for the year.  This combined with your MAGI means that traditional IRA contributions are nondeductible.  It seems implausible that TurboTax would have allowed a deduction on Schedule 1 line 20, particularly if TurboTax shows this as your MAGI on TurboTax's IRA Deduction Worksheet. 

TurboTax did have a bug where it would miscalculate MAGI, if either of you have basis in nondeductible traditional IRA contributions and either of you receive income from an inherited  traditional IRA.  This bug was present for both the calculations of MAGI for the limit on the deduction for a traditional IRA contribution and  the limit on a Roth IRA contribution.  I saw that developers corrected one of these MAGI calculations in 2023 TurboTax corrected but I don't think that the other one was corrected.  If this bug caused TurboTax to miscalculate your MAGI resulting in an improper allowance of the deduction on Schedule 1 line 20 and you have interest or penalty to pay on the balance due with the IRS correction, the TurboTax calculation warranty should reimburse you for the interest and penalty (but not the additional income tax itself).

[Tr221]

Thank you for your very informative and helpful reply.

On TurboTax mistakes, we must remember our great President Reagan said: “trust but verify”