More about compensation for IRA contributions

[MN dhawk]

Thanks for the previous comments about whether non self-employment fiduciary fees allow IRA contributions.

My next new client had filed his own returns for 2006 & 2007 and not bothered with Schedule D for same day sales of stock options in both years. Why bother with the pesky 1099B when all the income is in the W2 anyway??

I would have just done Schedule Ds for both years but on his way out the door, he asked if the option income qualified for the traditional IRA deductions that he had already made for 2007.

For 2006, he had not deducted an IRA and the IRS has sent a bill for the missing Schedule D option basis. Also, he has dealt with Social Security who wanted to reduce his 2006 payments for what they saw as excess earnings. After Social Security found out that his entire W2 was option income, they dropped the matter. For 2006 all that is needed is Schedule D.

My only question is about 2007. The entire W2 is option income and he has no other income that would qualify for an IRA contribution. Social Security tax & Medicare tax was withheld. The entire box 1 amount was coded V in box 12a. The option was granted prior to retirement.

Is this income like salary which would allow an IRA or like deferred compensation which would not?? Thanks.

[joanmcq]

I would put my vote in at deferred comp. This is just off the top of my head and with consideration of the prior discussion. He did not actually earn any income in 2007, only sold stock, part of the basis of which, is considered compensation, but was compensation for labor done in a previous year, not 2007.

[jainen]

>>Is this income like salary which would allow an IRA or like deferred compensation which would not?<<

Pub 590 defines compensation on page 8. It includes anything reported in Box 1 (except distributions from a non-qualified plan earned in a previous year). Such income qualifies for an IRA contribution in the normal way.

[MN dhawk]

Thanks for the help.