IRS Compensation Requirement To Deduct IRA Contributions

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.
wages, salaries, etc.
interest and
dividend income.
commissions.
pension or annuity
income.
self-employment income.
deferred compensation.
alimony and separate maintenance.
income from certain
partnerships.
nontaxable combat pay.
any amounts you exclude
from income.

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
Ansari Law Firm

Author Ansari Law Firm

More posts by Ansari Law Firm