Individual Retirment Account Flashcards
Generally, which of the following rules apply to Roth IRA’s?
Contributions to Roth IRA’s are non-deductible, while qualified contributions to Traditional IRA are deductible
Jacob’s return is missing information regarding his IRA contribution. Which of the following sections of his tax return should have included this content?
An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. You want to include your IRA information because you may be able to deduct some or all of your contributions to it, and they are generally not taxed until they are distributed. This information should be included in Adjustments to Income.
Peter and Jill are married and file a joint return. Jill was a media relations manager for a large firm and earned $98,000. Peter owns a graphic design business that showed a net profit of $500. In 2023 Jill was covered by an employer’s plan, but Peter was not. Neither has reached age 50. Their Modified Adjusted Gross Income was $155,000. What is the maximum deductible amount that can be contributed to a traditional IRA for Peter?
If a taxpayer files a joint return, the taxpayer may be able to contribute to a traditional IRA or Roth IRA even if the taxpayer did not have taxable compensation as long as the taxpayer’s spouse did. Each spouse can make a contribution up to the current limit; however, the total of the combined contributions (taxpayer’s and spouse’s) can not be more than the taxable compensation reported on their joint return. Answer $6500
Which of the following is compensation for the purpose of contributions to individual retirement accounts?
Deferred compensation received.
Foreign earned income excluded from income.
Pension or annuity income.
Taxable alimony and separate maintenance paid under the terms of a divorce decree finalized before 2019
For IRAs, consider the term compensation is direct payment received for active effort. The most common form of compensation is wages.
Taxable compensation includes income such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments received by an individual paid under the terms of a divorce decree finalized before 2019 are treated as compensation for IRA purposes.
Compensation 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.
A contribution to a traditional individual retirement account (IRA) is NOT deductible for the tax year 20X2 in which of the following situations:
IRA contributions can not exceed taxable compensation. Taxable alimony is considered compensation for IRA purposes. This usually refers to alimony paid under a pre-2019 agreement that was deductible by the payor and included in the recipient’s gross income. answer: The taxpayer’s only source of income is taxable interest.
Ben has a filing status of single. He has only one traditional IRA and his basis is $8,800. On December 31, he converts $44,000 of the $88,000 IRA value to a Roth IRA account. Ben’s AGI before considering the conversion is $62,000. What amount of income is added to Ben’s tax return as a result of the IRA conversion?
EXPLANATION
Distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until the entire basis has been distributed, each distribution is partly nontaxable and partly taxable.
To determine the nontaxable percentage of the distribution, divide the basis at the beginning of year (plus contributions for the tax year) by the total value of all IRAs at the end of the year (plus distributions in the tax year).
His IRA has a basis equal to 10% of the total value of the IRA so 10% of the $44,000 distribution is considered a return of capital. The remaining $39,600 is ordinary income.
$8,800 ÷ $88,000 = 10% nontaxable percentage of the distribution
$44,000 × 10% = $4,400 nontaxable amount of the distribution (this is the part of the distribution that represents basis or return of capital)
$44,000 distribution – $4,400 nontaxable amount = $39,600 taxable amount of the distribution (income) from converting IRA to a Roth IRA
What is the maximum allowable deduction for contributions to a Roth IRA for 2023?
Contributions are not deductible
Bonnie is single and age 35. She received income from the following sources during the year:
wages of $2,500
dividends and interest of $600
royalty income of $400
capital gains of $35,000
What is the maximum amount she can contribute to a traditional IRA for 2023?
For 2023, the most that can be contributed to a traditional IRA generally is $6,500 ($7,500 if age 50 or older), or taxable compensation for the year, whichever is smaller. Her taxable compensation is $2,500 (her wages), so that is also her maximum allowable contribution to a traditional IRA.
Compensation includes wages, salaries, tips, bonuses, commissions, self-employment income, taxable alimony, and nontaxable combat pay. Compensation does not include earnings and profit from property (such as rental and capital gains), interest and dividend income, royalty income, pension or annuity income, deferred compensation, income from certain partnerships, and any amount excluded from income (other than combat pay).
Minnie’s tax return shows the following income:
$800 wages
$6,490 unemployment compensation
$1,000 alimony received under the terms of a divorce decree finalized before 2019
$8,000 rental income from apartment buildings she owns
What is Minnie’s earned income for the purpose of determining how much she can contribute to an IRA?
Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts individuals receive for providing personal services. For IRA purposes, compensation includes amounts considered taxable alimony and nontaxable combat pay.
Minnie’s earned income for the purpose of determining how much she can contribute to an IRA is $1,800. Only wages of $800 and taxable alimony of $1,000 count as compensation for IRA purposes, so they set the limit for the allowable contribution amount.
All of the following are correct EXCEPT:
A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met.
A qualifying relative need not live with the taxpayer provided they meet all other tests and are related in one of the following ways:When taking the exam, if you come across a question like this you are best served to focus on the most common application of the rule. A valid SS, ATIN, or ITIN is a requirement to claim a dependent. But there is an exception if a child is born and dies in the same year and a taxpayer did not receive a Social Security Number for the child. In that case, the taxpayer can claim the child as a dependent but must attach a copy of the child’s birth certificate, death certificate, or hospital records instead. Unfortunately, while exceptional circumstances may make this answer false, it is not the best answer as the best choice is always a false statement.
Abbey and Ben have several people who lived with them during the latest tax year. Which of the following individuals qualifies as their dependent?
The 19-year-old daughter of a friend who lives with the taxpayers while attending college from September through May. She lives free of charge and pays no expenses.
The taxpayer’s 24-year-old son who only lives with the taxpayers during the summer months and holidays. The rest of the year he is a college student and makes $12,000 per year in salary.
The taxpayer’s 20-year-old married daughter whose husband is away on military duty. The daughter will file a joint return with her husband to pay tax due.
The taxpayer’s 12-year-old daughter who attends boarding school during the year
The daughter of the friend is not a dependent because she is not a blood relative and she did not live with the taxpayer for the entire year. The 24-year-old son made too much money even if he is a student because he is 24 or older. The 20-year-old daughter is married and will file a joint return with her husband; this precludes her from being a dependent on her parent’s tax return. The 12-year-old daughter is a blood relative who is considered to have lived with her parents for the entire year even though she attends boarding school.
Roger Miller, single and age 75, has income of $50,000. He wants to contribute to a Roth IRA for himself. Can he?
There is no age limit to establish or contribute to a Roth IRA, so long as the taxpayer has taxable compensation during the year for which a contribution is made.
When figuring compensation for a self-employed individual for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following statements is NOT true?
Self-employment income must be reduced by the deduction allowed for one-half of your self-employment taxes.
When you have both self-employment income, and salary and wages, your compensation includes both amounts.
If you have a net loss from self-employment, you must subtract the loss from any salary or wages received when figuring total compensation.
In order to include net earnings from a trade or business as compensation, your personal services must be a material income-producing factor.
If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
answer C
Total Compensation:
Total compensation includes all forms of income, such as salaries, wages, bonuses, self-employment income, and other sources.
However, when calculating total compensation, do not subtract the net loss from self-employment.
In other words, even if you have a net loss from your business, it does not reduce your salaries or wages for the purpose of determining your overall compensation.
