Revenooer Rants: When is an IRA contribution deductible?
November 4, 2015
Not really a trick question — the law permits deduction of an IRA contribution in the tax year it is actually made — with one little modification: you can still deduct your 2015 contribution, f'rinstance, if you deposit it no later than April 15, 2016.
So here come taxpayers Mr. and Mrs. Stephen J. Dunn – he a tax lawyer, no less — to butt heads with the Tax Court on this question. During the first part of 2008, Dunn was employed by a private law firm, and was an "active participant" in that firm's qualified retirement plan. (He became self-employed in late 2008 and remained self-employed through the end of 2010.)
Recall that for taxpayers with incomes above a certain level, IRA contributions are not deductible when one is an "active participant" in an employer plan. Nonetheless, Dunn claimed a deduction for his IRA contribution in 2008. Upon audit, the Revenooers disallowed the deduction because of the "active participant" status.
But the taxpayer concocted the somewhat novel argument that the 2008 IRA contribution was an "excess contribution" which could be carried forward or, alternatively, should be deemed to have been made for 2009.
"No dice" concluded the Tax Court. Each IRA contribution year stands on its own. And, adding insult to injury, clipped Dunn for the "accuracy-related penalty," based on the fact that as an experienced attorney, he should have known better that his arguments "have no support in the Code, the regulations, relevant case law, or basic tax principles."
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And we were struck by the common sense words of Thomas Sowell, the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution, as published in the Fall 2015 edition of the Hoover Digest. To wit:
"In a recent panel discussion on poverty at Georgetown University, President Barack Obama gave another demonstration of his mastery of rhetoric — and disregard of reality … In Obama's rhetoric, those who produced the wealth that politicians want to grab … are called "society's lottery winners." Was Bill Gates a lottery winner? Or did he produce and sell a computer operating system that allows billions of people around the world to use computers, without knowing anything about the inner workings of this complex technology? Was Henry Ford a lottery winner? Or did he revolutionize the production of automobiles, bringing the price down to the point where cars were no longer luxuries of the rich but vehicles that millions of ordinary people could afford, greatly expanding the scope of their lives?
"Most people who want to redistribute wealth don't want to talk about how that wealth was produced in the first place. They just want 'the rich' to pay their undefined "fair share" of taxes. This share must remain undefined because all it really means is "more." Once you have defined it — whether at 30 percent, 60 percent, or 90 percent — you won't be able to come back for more."
CONSULT YOUR TAX ADVISER – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at email@example.com.