IRS Compensation Requirement To Deduct IRA Contributions
It is important to understand how the IRS defines compensation in order to deduct your IRA contributions. For example, you own an S-Corporation and you are the single member owner and employee. If you take a salary of $30,000.00 as a W-2 wage, and then, another $60,000.00 as a dividend at a lower tax bracket, you are limited to 25% of the $30,000.00 to make your IRA contribution. Dividend income does not qualify as a deduction.
| Includes … | Does not include … |
| earnings and profits from property. |
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| wages, salaries, etc. | |
| interest and dividend income. |
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| commissions. | |
| pension or annuity income. |
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| self-employment income. | |
| deferred compensation. | |
| alimony and separate maintenance. | |
| income from certain partnerships. |
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| nontaxable combat pay. | |
| any amounts you exclude from income. |
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Compensation does not include any of the following items.
- Earnings and profits from property, such as rental income, interest income, and dividend income.
- Pension or annuity income.
- Deferred compensation received (compensation payments postponed from a past year).
- Income from a partnership for which you do not provide services that are a material income-producing factor.
- Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b.
- Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.IRS Compensation Requirement To Deduct IRA Contributions
