Does income from exercised non statutory stock options reported on W2 count as earned income so I can contribute to my IRA? I'm retired & not contributing to a 401K plan.

Forum|Forum|6 years ago
June 1, 2019
3 replies
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My goal is to reduce taxes for 2015 by making a deductible IRA contribution. I don't have a job in retirement so the question is really whether the option income counts as "earned" allowing me to make the contribution and take the deduction.

TurboTax Premier Windows

Best answer by dmertz

The amount on your W-2 that is considered eligible compensation for making an IRA contribution is the amount in box 1 minus the amount in box 11. I suspect that you box 11 has the same amount as is in box 1, so none of this income would be eligible compensation.

dmertzAnswer

Employee

dkowalski

Employee

What if line 11 is blank, but line 12 has an amount equal to line 1. with a V code?

danwilcox77

I just received a tax due notice from the IRS for this exact situation. I’m retired and received a W2 from former employer. Box 1 shows 1) voluntary deferred compensation under 509 plan that was paid in the current year (also reported in box 11) and 2) proceeds from stock options vested in the current year (also reported in box 12a code V) and 3) proceeds from a bonus I was eligible for that was subject to two year delay and amount is based how the company stock performed. The latter 2 items I was never taxed previously for SS and Medicare so they are included in my box 3 & 5 earnings.

My interpretation of the various literature is that I could make a IRA contribution based on the earnings (box 1 less box 11) that were not previously available to me until the year in which they were paid and reported in the W2 which is after my retirement date. I’ll post the outcome.

dmertz

Employee

Perhaps the IRS is disputing the correctness of the reporting on the W-2. Pub 590-A says, "The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans)."

TurboTax does its calculations based on the numbers in box 1 and box 11 and has no way to determine if those numbers are correct. TurboTax's behavior also depends on the user's response to the follow-up question to a box 11 entry asking if the amount in box 11 is from a nongovernmental 457(b) plan or a nonqualified deferred compensation plan. If you answer No, TurboTax will not reduce the amount in box 1 by the amount in box 11 when determining available compensation for making an IRA contribution. (I'm not sure why TurboTax asks this question unless it's common for amounts that are not from a nongovernmental 457(b) plan or a nonqualified deferred compensation plan to be improperly included in box 11.)

Sartori162

Has a tax expert weighed in on this question yet -- For a retiree with no other 'earned' income, does the gain from an NQSO same-day sale exercise meet IRS requirements for ‘earned income’ to enable a deductible contribution to a traditional IRA?

• During the entire tax year, I was a retiree receiving a pension, but otherwise “not covered by an employer retirement plan".

• During the tax year, I exercised an NQSO via a same-day sale. The gain was subject to withholding for federal income tax, Social Security tax, and Medicare tax. I received a W-2 from my previous employer that showed the gain in Box 1. Box 11 was blank. Box 12 showed the same amount as box 1 with the code V.

macuser_22

Employee

@Sartori162 wrote:

Has a tax expert weighed in on this question yet -- For a retiree with no other 'earned' income, does the gain from an NQSO same-day sale exercise meet IRS requirements for ‘earned income’ to enable a deductible contribution to a traditional IRA?

• During the entire tax year, I was a retiree receiving a pension, but otherwise “not covered by an employer retirement plan".

• During the tax year, I exercised an NQSO via a same-day sale. The gain was subject to withholding for federal income tax, Social Security tax, and Medicare tax. I received a W-2 from my previous employer that showed the gain in Box 1. Box 11 was blank. Box 12 showed the same amount as box 1 with the code V.

No expert necessary. The IRS clearly says in pub 590A that compensation for IRA contributions is W-2 box 1 minus box 11. (Box 12 is irrelevant).

https://www.irs.gov/publications/p590a#en_US_2020_publink1000230357

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**