• Taxpayer and spouse may each make IRA contributions, subject to age and income limits. Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), has full details.
    • IRA contributions can’t exceed earned income. If a taxpayer has no earned income, they can’t make an IRA contribution.  Exceptions:  taxable alimony income, excludable Medicaid Waiver Payments.
    • Dollar limits for IRA contributions, below, are for the total contributions to traditional and Roth IRAs. Exceeding the dollar limit makes the return potentially out-of-scope, as discussed below.
    • IRA contributions that exceed contribution limits are subject to an annual additional tax as long as the excess continues (the tax is reported on Form 5329 Part III or IV), which makes the return out-of-scope. 
      • The contribution limit is the smaller of taxable compensation (Form 1040 Line 1 plus Schedule 1 Line 2a plus Schedule 1 Line 3) or $7,000 ($8,000 if age 50 or older at the end of 2024). If filing MFJ, the contribution limit applies separately to the taxpayer and spouse
    • Federally deductible contributions to traditional IRAs can be made regardless of taxpayer age; previously the maximum age was 70½.
      • Note: Deductible contributions to traditional IRAs made after reaching age 70½ affect the deductibility of QCD payments. See page 40 for details.
      • Note for CA returns: California does not conform. IRA contributions made after the taxpayer has reached age of 70½, are not deductible. A manual adjustment to CA Schedule CA is required, to increase income - see the section Manually Entering Income Differences on CA Schedule CA, page 107. The increased income appears on CA Schedule CA Part I, Section B line 8z.
  • To enter the IRA contribution amount (if MFJ, the total amount for taxpayer and spouse), go to the IRA Deduction page [Deductions > Adjustments > ....]
    • Coverage by a retirement plan is generally indicated in box 13 of Form W-2. Even if that box has been checked on a W-2 page, TaxSlayer won’t carry that information to its IRA Deduction page!
    • If TaxSlayer determines that an excess contribution has occurred, after “Continue” is clicked, it shows the Form 5329 page [Federal Section > Other Taxes > Tax on Early Distribution].
      • Advise the taxpayer that the penalty can be avoided and the return brought back in scope, if excess contributions are withdrawn by the filing deadline, including extensions. (Details in Pub 590-A.)
        • Form 5329 is one of ten for which a PDF can be created from a menu page within the return.
  • If either the taxpayer or spouse is covered by an employer’s retirement plan, then some of the allowable contributions may be nondeductible – they won’t reduce the taxpayer’s taxable income. Additional entries in TaxSlayer may be required.
    • Coverage by a retirement plan is generally indicated in box 13 of the Form W-2 from the employer.
    • If the taxpayer (and/or spouse, if a MFJ return) was covered by a retirement plan during the tax year, then deductible amount of the contribution depends on the taxpayer’s MAGI. For 2024, nondeductibility can begin once the MAGI reaches $77,000 (for single filers; higher for other filing statuses) and can equal the entire contribution (no deductible contribution allowed) with a MAGI as little as $87,000 (for a single filer; higher for other filing statuses). Details are in Pub 590-A.
    • TaxSlayer calculates the nondeductible amount. 
    • Compare the amount entered on the IRA Deduction page to the amount on Schedule 1 Line 19 (use the Summary/Print link on the left navigation bar).
      • If the two amounts are not the same, then go to Form 8606 - Nondeductible IRAs page [Deductions > Adjustments > Nondeductible IRAs] and fill in the form – see the IRS instructions for Form 8606. 
        • Form 8606 is one of ten for which a PDF can be created from the Adjustments menu. 
      • If a nondeductible IRA contribution is made, and deductions or conversions are taken from more than one IRA during the tax year, use the IRA Worksheet (https://cotaxaide.org/tools/).
  • An IRA contribution can make the return eligible for the Schedule 3, Line 4 - Retirement Savings Contribution Credit (discussed on page 94); TaxSlayer automatically calculates and applies this credit.
  • Taxpayers who contributed to a traditional IRA for the current tax year have the option of recharacterizing their contribution as a contribution to a Roth IRA until they file their return (or the April filing deadline, whichever comes first).
    • Recharacterizing from a traditional IRA to a Roth IRA is valuable if the taxpayer didn’t get a benefit from the IRA contribution (see Schedule 1, Line 20, IRA deduction, and Schedule 3, Line 4, Retirement savings contribution credit).
    • Recharacterizing the other way – moving money from a Roth IRA to a traditional IRA - can make sense if the taxpayer would lower their AGI, especially if it helps avoid a CA no-health-insurance penalty.
    • If recharacterization makes financial sense:
      • The taxpayer must arrange the recharacterization through their IRA trustee.
      • The recharacterization must be done before the return is completed and filed, so the taxpayer must return after obtaining documentation from their IRA trustee.

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