- 10 -
$7,762.11 that petitioners concede is taxable earnings) is
taxable under sections 408(d)(1) and 72.
Discussion
1. General Legal Background
Generally, a taxpayer is entitled to deduct the amount
contributed to an IRA. Sec. 219(a); sec. 1.219-1(a), Income Tax
Regs. The deduction in any taxable year, however, may not exceed
the lesser of $2,000 or an amount equal to the compensation
includable in the taxpayer's gross income for such taxable year.
In addition, the amount of the deduction is limited where the
taxpayer was, for any part of the taxable year, an "active
participant" in a retirement plan qualified under section 401(a)
or a plan established for its employees by the United States, by
a State or political subdivision thereof, or by any agency or
instrumentality of any of the foregoing. Sec. 219(g)(1),
(5)(A)(i), (iii). In the case of an active participant who files
a return as a single individual, the deduction is reduced using a
ratio determined by dividing the excess of the taxpayer's
modified adjusted gross income (modified AGI) over $25,000, by
$10,000.10 Sec. 219(g)(2) and (3). In the case of an active
participant who files a joint return, the deduction is reduced
10 As relevant herein, modified adjusted gross income
means adjusted gross income computed without regard to any
deduction for an IRA. Sec. 219(g)(3)(A).
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