Per IRS Publication 541, a partner's adjusted basis decreases for "partner's distributive share of
nondeductible partnership expenses that are not capital expenditures.
However, all eligible workers and spouses can make
nondeductible contributions to a traditional IRA, regardless of income.
Rollovers, conversions,
nondeductible contributions and inherited accounts can all have an impact on how distributions are taxed.
The practical effect is that a taxpayer must recover any nontaxable amount (basis) ratably as distributions are received, by tracking basis on Form 8606,
Nondeductible IRAs.
The literal language of the section does not contain any carryover provision for
nondeductible, noncapital expenses or for the oil and gas depletion deduction.
So if you've maxed out your 401(k) or 403(b) contributions and don't qualify to make Roth IRA contributions because of your income level, you still can make
nondeductible contributions to a traditional IRA in 2009 and 2010 and then convert it to a Roth IRA in 2010.
Some owners, however, make
nondeductible contributions to their IRAs that, if withdrawn, would be considered a tax-free return of
nondeductible contributions.
As important, there are a host of court decisions that provide guidance to distinguish between
nondeductible fines and penalties and deductible amounts, such as restitution or other compensatory payments.
Examples include research and development tax credits, foreign income,
nondeductible book accruals and tax carryover benefits.
At higher levels of income (of if you also have a Keogh or your spouse is covered by a pension), you have to decide whether a
nondeductible IRA is worthwhile.
For example, grocery receipts and other
nondeductible expense receipts and statements can be destroyed after they have been recorded for budgeting purposes.
However, clients may make
nondeductible contributions to an IRA when adjusted gross income is too high to qualify for a tax deduction.
