I had clients last tax season filing MFJ with AGI of $80,000. The wife worked at several jobs and was also self-employed, and contributed $4500 to her IRA. One of her employers issued a W2 for $100 and checked the box for retirement plan. She told me she wasn't covered as she was just a temporary employee there, so I ignored the box and took the deduction for the IRA. Is this going to cause problems down the road with the IRS? Should I have her get a revised W2 from the employer without the box checked?
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It will cause a problem if the client was really covered under a retirement plan. Have the client double check with the employer. Even if it is a small amount, any active participation is active participation in an employer plan. -
IRA problem
There ought to be a 'de minimus' exception. If you only made $ 100 covered by a retirement plan, then your retirement contribution would be so small it ought to be ignored or treated as a reduction to the amount you could contribute to an IRA. I don't think any such 'de minimus' exception is provided in the tax laws. However the IRS might be willing to ignore such a small coverage if it even existed--which is unlikely for someone hired on such a temporary basis.Comment
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You're right. There is no such exception, and I don't think it likely that the IRS would ignore it. It may somehow slip through, but I think it best to get a corrected W-2, if, indeed, the pension plan box was erroneously checked.Originally posted by Joe BtfsplkComment
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I'll second Rosieea's comment
It will take the IRS a year to get the matching done so start asking for the corrected W-2 now and you might have it when they send a notice.In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
Alexis de TocquevilleComment
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The client contacted her employer, and because it was a union job, they contributed $3 to the union pension fund on her behalf and therefore the box is properly checked. Should I amend the return or should I wait until the IRS catches up with her or hope it won't catch it. It makes her IRA contribution non-deductible, and amounts to $675 in extra tax she would owe.Comment
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prepare the 1040X
You should prepare the 1040X (without charge -- it was your error because the W-2 was plainly and correctly marked) and give it to the client. It is her decision whether to file or not.
As for a de minimis exception, the rule applies if she is eligible to participate, even if she does not. No doubt she got adequate written notice from both her employer and her union. You should ask her to bring the papers to you so you can help her take maximum advantage of her retirement fund. (That would not be without charge!)Comment
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You stated the client was self employed. Maybe you can have broker switch to Sep if they had the income from SE. Just a thought.Comment
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Too late
But wouldn't this have to be done by the due date of the return?Originally posted by BuckyComment
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IRA to SEP
First did your client have enough SE income so that 18% of net will be equal to or more than the IRA contribution?
Some investment companies are very flexible about moving money from an IRA to a SEP-IRA. It can't hurt to ask if they will do it.
The other thing is just make the IRA contribution non deductible. This avoids all the issues about removing it. Obviously this does not do anything about the extra taxes that are due.Comment
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IRA contribution
Could this IRA contribution be transferred to the following year? Trf from 2005 to 2006?Comment
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Small contribution = Big loss
Ouch ... that hurts!!Originally posted by Delta John
Several years ago, before the rules were relaxed, any plan coverage by either spouse nixed an IRA deduction for both spouses. In one of those years the wife of a married couple client retired from the State of California. She was about 40-yo and worked only part-time. She retired in December 199X but got her final paycheck on January 1st of the following year. The check had a deduction for her mandatory contribution to the State retirement system. After much research and debate the clients and I finally concluded that the January payment knocked out an IRA deduction for her self-employed husband as well as a spousal IRA deduction for her.
Even though this happened several years ago when the rules were more restrictive, the same thing could easily happen today. In my client's particular case the wife didn't even work in the year she received the disqualifying wages. For fairness purposes the eligibility rules should be modified to allow for this type of fact pattern as well as the de minimus exception proposed by others in this thread.Roland Slugg
"I do what I can."Comment
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Delta John
...What's that Flower You've Got On?
Yes, Houston, we have a problem.
The check mark is used to enter into the mass IRS database to determine eligibility. There is no comparison of this checkmark to the amount of the W-2. The checked box will cause IRS to disallow the adjustment.
I know this will cause trouble because I've had a couple of HRB customers in bygone years come to me and ask why IRS was disallowing their IRA deduction. I don't think this would happen today because their software would catch it. In fact, if you used software, then YOUR software should have stopped the deduction if the checkmark was entered into the databank.
The other thing I want to mention is that I seriously doubt this person was eligible to participate if they worked part-time and only earned $100. Some clerk was probably told to enter the checkmark for ALL employees when W-2s were prepared. This happens very frequently, is most employers regard the issuance of W-2s as a mass printing project, and don't observe some of the more subtle requirements.Comment
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