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Author: poortaxed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121565  
Subject: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 9:56 AM
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My wife and I both had legitimate Roth IRA's from 2007. She made about $9000 in Box #7 on a 1099-MISC. Most of that (about $7600) was deducted for business expenses for her.

Does the entire $9000 count for her Roth Contribution or only what is left after deductions?

My only income was from a fellowship. Total fellowship about $40000 but half in 2007 and half in 2008. I reported the first half of the fellowship in 2007 but had other income so I could contribute to my Roth IRA that year.

So, what I need to do is call the investment company for both my wife and me and re-charactarize the over Roth IRA contributions for 2008 into a traditional IRA. Then I convert it right back into the Roth IRA. This allows me to in a sense have my 2008 Roth contribution indirectly and to still be able to put the $5000 in for 2009 when I earn "real" income according to the IRS.

Can I do this the next day after it is converted to a traditional IRA?

I still have to look up how to report all that but should be able to figure it out.

Thanks
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104327 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 10:09 AM
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My wife and I both had legitimate Roth IRA's from 2007. She made about $9000 in Box #7 on a 1099-MISC. Most of that (about $7600) was deducted for business expenses for her.

Does the entire $9000 count for her Roth Contribution or only what is left after deductions?


Less than that. It's the Schedule C bottom line minus the adjustment to income for 1/2 the self-employment tax.

My only income was from a fellowship. Total fellowship about $40000 but half in 2007 and half in 2008. I reported the first half of the fellowship in 2007 but had other income so I could contribute to my Roth IRA that year.

I'm a little lost here. Did you report sufficient wage income to support your 2007 Roth contribution? (It appears your wife didn't. More on that below.)

So, what I need to do is call the investment company for both my wife and me and re-charactarize the over Roth IRA contributions for 2008 into a traditional IRA. Then I convert it right back into the Roth IRA. This allows me to in a sense have my 2008 Roth contribution indirectly and to still be able to put the $5000 in for 2009 when I earn "real" income according to the IRS.

You haven't offered any information about 2008 contribution amounts, so this is general information.

If you don't have the earned income to support a Roth contribution you don't have the earned income to support a traditional contribution, so recharacterization won't help you. You're dealing with an excess contribution, and the only way to fix that is to withdraw it, along with the earnings on it. Any positive earnings will be subject to the 10% premature distribution penalty if you're under 59 1/2.

As for your wife's 2007 Roth contribution, if she overcontributed it's too late to fix it. She owes the 6% excess contribution penalty. Moving on to 2008, she reduces her maximum IRA contribution by the 2007 excess. If it turns out she made an excess 2008 contribution she fixes it the same way you do.

All this is coverd in Publication 590 and Form 8606 (separate instructions).

Phil

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Author: poortaxed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104328 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 10:24 AM
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I'm a little lost here. Did you report sufficient wage income to support your 2007 Roth contribution? (It appears your wife didn't. More on that below.)

In 2007 we both had earnings that allowed us to contribute. I had a part-time job in addition to the fellowship.

The $9000 1099 was for 2008. I'm confused as to why the $9000 doesn't count as income, as that is what she survived on for the year with a bit of savings, but can't argue with the tax-man.

You haven't offered any information about 2008 contribution amounts, so this is general information.

We both contributed $5000 to our Roths in 2008.

If you don't have the earned income to support a Roth contribution you don't have the earned income to support a traditional contribution, so recharacterization won't help you. You're dealing with an excess contribution, and the only way to fix that is to withdraw it, along with the earnings on it.

The fellowship was a Fulbright Grant and is reported as taxable income. Why can't I contribute pre-tax dollars of taxable income to a traditional IRA?

I will not be a high earner throughout my career as I will be in education. I want to get as much contributed to my accounts as I can while I am young (29). If there is any way that I can contribute this year please let me know.

If not I will take my lumps and wait till next year.

Thank you in advance.

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Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104331 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 1:10 PM
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Excess contributions calculations are such a drag. One company wouldn't calculate it, I had to. Manually with each monthly purchase and the gain/loss associated with each transaction. THAT worksheet I definitely have kept. I had to amend my 2007 return, twice!! (thru NO fault of my own, it's due to the miscalculations of the HCE numbers from my 401k trustee...3rd year in a row). Anyway, I had to do excess withdrawals for as little as $10.71. It all adds up.

MZ4

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Author: poortaxed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104335 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 3:04 PM
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Excess contributions calculations are such a drag. One company wouldn't calculate it, I had to. Manually with each monthly purchase and the gain/loss associated with each transaction. THAT worksheet I definitely have kept.

I am not sure I understand what you did. Could you explain? Did you have too little or too much income? What did you do manually each month?

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104340 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 5:48 PM
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The fellowship was a Fulbright Grant and is reported as taxable income.

Where on your return? If it's line 7 it can be the basis for an IRA contribution. If it's line 21, which is where I think it belongs, it can't.

Why can't I contribute pre-tax dollars of taxable income to a traditional IRA?

Because only taxable "compensation" can be used as a basis for IRA contributions. That's wages/salaries (line 7) plus self-employment (line 14 minus the adjustment for S/E tax) plus alimony. See Publication 590.

Phil

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Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104345 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 6:55 PM
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"Excess contributions calculations are such a drag. One company wouldn't calculate it, I had to. Manually with each monthly purchase and the gain/loss associated with each transaction. THAT worksheet I definitely have kept."

I am not sure I understand what you did. Could you explain? Did you have too little or too much income? What did you do manually each month?
-------------------------

I had to "recharacterize" previous contributions to stay within the limits for ROTH & IRA contributions based upon my revised taxable income. The real drag was that I originally calculated my income and then converted non-deductible IRA accounts to ROTH's. Then, I had to revise that, as well as recharacterize some portions. It's all could have been avoided if the trustee (Vanguard) had correctly calculated the original adjustment to my 401k deposits.

The bigger problem is that they (the trustee) has until 3/15 each year to issue those adjustments; which in reality is a check cut to me for the "over funding" of my 401k. Then, opps, it was wrong. Now I've got to get that cash back from wherever I deployed it, send it back, then they reissue.....arggggghhh. a MAJOR headache and paperwork trail.

MZ4

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Author: MarinBMWZ4 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104347 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/7/2009 6:58 PM
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Oh, I also have to file a revised 1040. More fun.

MZ4

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Author: poortaxed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104358 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/8/2009 10:29 AM
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It seems that my income from the grant will not count.

Her income of $9000 plus some sales of $2500 will count after expenses and self-employment tax right?

What if I buy $8000 worth of her work? Would that count as earned income for her? Since we are married filing jointly then the income would count for both of us right?

Last question, if she deducts legitimate expenses from the $8000 then it won't count towards the earned income threshold and all my thinking is moot right?j

I just want to contribute any way I can for 2008 but am just about out of ideas and will have to call my brokerage.

Thanks for the help and I welcome any other ideas that you might have.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104361 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/8/2009 10:46 AM
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Her income of $9000 plus some sales of $2500 will count after expenses and self-employment tax right?

What if I buy $8000 worth of her work? Would that count as earned income for her? Since we are married filing jointly then the income would count for both of us right?


I'm lost again. I thought we were talking about 2008. If you buy--and I don't mean "buy"--$8,000 of her work that will be 2009 income. (More on that purchase below.)

Last question, if she deducts legitimate expenses from the $8000 then it won't count towards the earned income threshold and all my thinking is moot right?

I assume she's a cash basis taxpayer, so she deducts her expenses in the year she incurs them and reports her receipts in the year she receives them.

IIRC you're 29. As good a time in life as any to remind yourself that one way of defining morality is doing the right thing when it's inconvenient to do so. Doing so will serve you well throughout life.

Phil

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Author: poortaxed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104363 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/8/2009 11:20 AM
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Thanks Phil.

Yes, she is a cash basis taxpayer and keeps good records and log books. The purchase won't work.

I will withdraw the over-contributions. I know you have shown me and I have read it with the IRS but, one last time.

The only part of the $9000 1099 from 2008 that can be used to count toward earned income is $9000 - expenses - self employment tax, not $9000 - self employment tax, correct?

Thanks for all your help and hopefully I land a job this year and can make more.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104364 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/8/2009 11:26 AM
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The only part of the $9000 1099 from 2008 that can be used to count toward earned income is $9000 - expenses - self employment tax, not $9000 - self employment tax, correct?

Almost. It's the Schedule C bottom line minus the 1040 line 27 deduction for 1/2 S/E tax.

I thought at some point there was a mention of another $2,000 or so of her income. If it's taxable compensation, that also adds to the amount available.

Phil

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104379 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/9/2009 1:44 AM
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poortaxed writes (in part):

My wife and I both had legitimate Roth IRA's from 2007. She made about $9000 in Box #7 on a 1099-MISC. Most of that (about $7600) was deducted for business expenses for her.

Does the entire $9000 count for her Roth Contribution or only what is left after deductions?


I reply:

Let me restate this so that I'm certain I understand it. Your wife had approximately $9,000 in revenues from self-employment in 2008. Later in the thread, you mention $2,500 in sales. I'll assume that's self-employment revenue as well.

To generate this revenue, your wife had approximately $7,600 in deductible business expenses. Presumably, you haven't yet filed your return for 2008.

If you deduct the expenses, then you and your wife have overcontributed to your Roth IRAs. But except for the self-employment tax, I don't think there's any requirement that you deduct business expenses. You're allowed to, but if you think it's to your advantage not to, I believe you can get "credit" for the additional taxable income.

So the question is, is the extra tax liability worth it to you in order to more fully fund your Roth IRAs? That's a question no one here can answer for you. --Bob

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104383 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/9/2009 6:40 AM
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If you deduct the expenses, then you and your wife have overcontributed to your Roth IRAs. But except for the self-employment tax, I don't think there's any requirement that you deduct business expenses.

I disagree. I recall hearing about a criminal case which was based on underreported expenses. Of course, there was corresponding unreported income, but they couldn't find it (a laundromat). They could sure find the electric and water bills, though.

Phil

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104387 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/9/2009 8:52 AM
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If you deduct the expenses, then you and your wife have overcontributed to your Roth IRAs. But except for the self-employment tax, I don't think there's any requirement that you deduct business expenses.

I disagree. I recall hearing about a criminal case which was based on underreported expenses. Of course, there was corresponding unreported income, but they couldn't find it (a laundromat). They could sure find the electric and water bills, though.


There's also the situation where EITC is in play and not taking business expenses could lead to a higher EITC.

Ira

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104397 of 121565
Subject: Re: Roth IRA - 1099 and Fellowship Income Date: 2/9/2009 12:26 PM
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I disagree. I recall hearing about a criminal case which was based on underreported expenses. Of course, there was corresponding unreported income, but they couldn't find it (a laundromat). They could sure find the electric and water bills, though.
The evidence was underreported expenses - but they were being prosecuted for under-reported income.
I don't think that's the same.

If I forget to put down a charitable contribution on my income taxes, or lose the receipt and therefore can't put it on my taxes, I have to pay the extra taxes, but I haven't broken any laws.

Receipts get lost all the time. My understanding is that if some of the receipts for these business expenses were lost they couldn't be claimed as expenses.
Which to me means that it would be legal to underreport those expenses and just fail to have those receipts.

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