The client in this situation is a married couple. The wife is employed full-time, earning a substantial salary, and is an active participant in her employer's pension plan. The husband is a camera operator in the motion picture industry and a member of the appropriate union. He has many employers in the course of a year; most treat him as a W-2 employee, but a few pay him as an independent contractor and issue a Form 1099-MISC. Yet employee vs contractor is not the issue here.
For the year in question, which was 2008, the husband had made a small contribution, less than the maximum, to a traditional IRA account for himself, and claimed a tax deduction for the full amount of the contribution on the couple’s joint Form 1040.
The IRS CP-2000 notice indicated that the husband could not deduct the IRA contribution because of the limitations that result from coverage by an employer retirement plan during the year. The AGI reported on the couple’s 2008 Form 1040 was well over the income threshold for an “active participant” employee. The IRS removed the deduction and recalculated the tax liability accordingly, adding penalty and interest.
However, while the wife was, the husband was not an active participant in an “employer” plan (note the important word here is employer) at any time during 2008. This is true even though when he retires the husband will be able to collect on a pension.
As a union member the husband pays dues to the union. The union is not his employer. The various movie production companies that hire him during the year, generally for short-term projects, are his employers. These various employers make contributions based on earnings to the Motion Picture Industry retirement plan. But they do not make contributions for the husband to any plans that they themselves maintain for their employees.
The husband is not permitted to make any contributions to his union retirement plan.
The union retirement plan is not an “employer plan”. Therefore the husband is not an active participant in an employer plan, even though employer contributions are credited to his “account” during the year.
For tax year 2008, if only one spouse is an active participant in an “employer plan”, the other spouse, whether working or nonworking, can deduct the entire contribution to his/her IRA up to the statutory maximum if the couple’s combined modified Adjusted Gross Income is $159,000 or less. The MAGI on the joint 2008 Form 1040 for my clients was less than $140,000.
The husband is entitled to a full deduction for his IRA contribution.
We looked back at the W-2s issued to the husband for 2008 and found that one of the employees had checked the box to give the impression that the husband was a participant in that employer’s retirement plan. This is apparently what triggered the IRS CP-2000 notice. This was wrong.
Perhaps the employer, or his bookkeeper or accountant, thought that because the employer made contributions to the union retirement plan the husband was an “active participant”. But whoever so thought was wrong.
So if you are a union member in a situation similar to that of my client, and one or more of your 2010 W-2s have the Retirement Plan box checked, contact the employer(s) immediately and have him issue to you, and the Social Security Administration, a corrected Form W-2!
Have any of my fellow tax pros out there come across a similar situation, or disagree with me on this issue? I welcome your comments.