Individual Taxation Chapter 13 Homework Required Information [The following information applies to the questions displayed below.] In 2021, John (age 60 and single) has earned income of $4,800. He also has $36,100 of unearned (capital gain) income. a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2021? Maximum deductible IRA Contribution $4,800 Explanation $4,800. Deductible contributions to an IRA account are limited to the lesser of $6,000 or earned income. If the individual is at least 50 years old by the end of the year, he/she may contribute of up to the lesser of $7,000 or earned income. In this case, John’s deductible contribution is the lesser of (1) his earned income of $4,800 or (2) the maximum deductible amount of $7,000. So, his deductible contribution is $4,800. c. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2021 if he has earned income of $13,900? Maximum deductible IRA contribution $7,000 Explanation $7,000. Deductible contributions are limited to the lesser of $6,000 or earned income. The $6,000 limit is increased to $7,000 for taxpayers who have reached the age of 50 by the end of the year (taxpayers age 50 or older at the end of the year are allowed to make an additional $1,000 catch-up contribution). Thus, John may make a total deductible contribution equal to the lesser of $7,000 ($6,000 + $1,000) or earned income ($19,400). So, he is allowed to deduct $7,000. Required information [The following information applies to the questions displayed below.] Harriet and Harry Combs (both 37 years old) are married, and both want to contribute to a Roth IRA. In 2021, their AGI before any IRA contribution deductions is $50,000. Harriet earned $46,000 and Harry earned $4,000. (Leave no answer blank. Enter zero if applicable.) a. How much can Harriet contribute to her Roth IRA if they file a joint return? Contribution to Roth IRA $6,000 Explanation $6,000. Individuals are allowed to contribute to a Roth IRA as long as their MAGI falls below certain phase-out threshold limits. For married individuals filing jointly, the ability to contribute starts to phase out once MAGI hits $198,000 and is fully phased out when MAGI reaches $208,000. Because Harriet and Harry’s MAGI is below $198,000, Harriet can contribute $6,000, the maximum contribution for taxpayers under age 50 at the end of the year. b. How much can Harriet contribute if she files a separate return? Contribution to Roth IRA $0 Explanation $0. The MAGI based phase-out range for married individuals filing separately is between $0 and $10,000. Thus, if Harriet files separately, she would not be allowed to contribute to Roth IRA because her MAGI is $46,000. c. How much can Harry contribute to his Roth IRA if they file separately? Contribution to Roth IRA $3, 600 Explanation $3,600 ($6,000 × 60%). Since Harry’s MAGI is 40% of the way between $0 and $10,000 [($4,000 − $0)/($10,000 − $0)], Harry is only allowed to contribute 60% (100% − 40% disallowed percentage) of the $6,000 maximum contribution for tax payers under 50 years of age at year end. A distribution from a traditional 401(k) account is excluded from the taxpayer’s gross income. - False Valerie received a distribution from her traditional 401(k) account this year. In which of the following situations will she be subject to an early distribution penalty? - Valerie is 53 years of age and retired when she receives the distribution. Explanation Taxpayers are subject to an early distribution penalty if they receive a distribution before they reach 59 ½ and are not retired, or have retired but not reached 55 years of age.
