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
|wages, salaries, etc.|
|pension or annuity
|alimony and separate maintenance.|
|income from certain
|nontaxable combat pay.|
|any amounts you exclude
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