Question

Ms. Ray is age 46 and single. Her employer made a $2,900 contribution to her qualified profit-sharing plan account, and she made the maximum contribution to her traditional IRA.

Compute her IRA deduction if Ms. Ray’s $51,400 salary is her only income item.

Compute her IRA deduction if Ms. Ray’s $68,450 salary is her only income item.

Compute her IRA deduction if Ms. Ray’s $68,450 salary and $7,420 dividend income are her only income items.

Answer 1

"2018 - Maximum annual contributions to Traditional and Roth IRAs combined cannot exceed: $5,500 (under age 50) $6,500 (age 50 or older)". In this case maximum Contribution made by Ms.Ray would be $5,500.

Profit sharing is a compensation paid to employees by companies as it is income to employees for tax purposes upon receipt unless made to deferred compensation plans.

Compensation for the purpose of IRA doesn't include Deferred compensation. So contribution made by employer to qualified profit sharing plan is not considering as compensation for the purpose of IRA.

Since Ms.Roy is covered by retirement plan at work , deduction limits are as follows:

"Single - If modified AGI is - Less than $63,000 - Then full deduction upto contribution made

- Morethan $63,000 but less than $73,000- Then a partial deduction

- Morethan $73,000 - Then no deduction "

A ) If Ms.Roy's salary is $51,400

Which is less than $63,000 so total contribution $5,500 (Mentioned in problem that maximum contribution made by Ms.Roy, Maximum contribution for under 50 age is $5,500) will be IRA deduction.

B) If Ms.Roy's salary is $68,450

Which is morethan $63,000 but lessthan $73,000 then partial amount will be available for tax deduction which will be $5,500*50%=$2,750

C) If Ms.Roy's salary is $68,450 and Dividend income $7,420

Answer would be same as (B) since compensation for the puropose of IRA doesn't include dividend income,rental income and interest income etc.