Michael on February 20th, 2009
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It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

I will probably not be working in the States during 2009, but I have rented out my condo in Boston, so I will have rental income of about $20,000 in 2009, but I plan to reduce the taxable income by deducting expenses like my condo fee.  Can I still say I have earned $20,000, and contribute $5,000 to my Roth IRA?

Hong – somewhere overseas

Straightforward Answer: Could be, if your tax preparer knows what questions to ask.

Detailed Explanation

In order to contribute $5,000 or more to a Roth or regular IRA, you must have earned at least that amount.  The types of earnings that count for this purpose are:

  • compensation as an employee
  • net-earnings from self-employment
  • alimony received

It is clear that none of the $20,000 rent you will receive can be considered either employee compensation or alimony.  Furthermore, the $20,000 you will receive is not net earnings (profit) but rather gross revenue.  As such, your expenses (like condo fees) will be deducted to calculate your net earnings from self-employment. If you had $20,000 or more in expenses, you would have no net earnings and no ability to contribute to an IRA.  However, you don’t have to take all of your expenses.  You could take $15,000 of expenses and show net earnings of $5,000.  Your personal exemption and standard deduction will wipe out any tax you owe on the $5,000 and yet you’d still be able to contribute to a Roth.

Not bad, right?

Keep in mind that in order for net earnings from self-employment to qualify as earnings for the IRA contribution test, you must be actively involved in the business – in your case managing the property – not just an investor.

Great question and another reason why you may very well pay less with a better tax preparer.

More questions about taxes?  Two of the most widely read posts in the history of the Beyond Paycheck to Paycheck blog are First Time Homebuyer Tax Credit: When a credit isn’t a credit but it’s still free money and Economic Stimulus Payments are now Recovery Rebate Credits – will you get yours?

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