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Federal Income Tax Retirement Accounts Tax Tax Deductions

Part-Time Employee Not Entitled to Deduction for IRA Contribution

Taxpayers who participate in their employer’s retirement plan are not able to deduct contributions the taxpayer makes to their IRA retirement account. This is also true for taxpayers who are entitled to participate in their employer’s retirement plan, but choose not do so. In Colombell v. Commissioner, T.C. 2006-184, the court considered whether an employee who was entitled to participate in her employer’s plan but was not qualified to do so, could deduct her IRA contributions.

Facts & Procedural History

In Colombell, the taxpayer was employed as a part-time nurse. Her employer maintained a defined benefit plan for full-time employees who worked more than a set number of hours each year. The taxpayer did not work enough hours to qualify for the plan. She opted to contribute to an IRA retirement account. The taxpayer claimed a Section 219 tax deduction for her IRA contribution on her timely filed tax return. The IRS denied the deduction and litigation ensued.

Generally, taxpayers are entitled to deduct their IRA contributions unless they (or their spouse) are an “active participant” in certain retirement accounts, such as the account that taxpayer’s employer provided to its full-time employees.

The IRS cited its regulations in support of the argument that the taxpayer was an “active participant” in her employer’s retirement plan because she was not excluded from it. The taxpayer in turn cited the definition in the Merriam-Webster Dictionary, arguing that she was not an “active participant” in her employer’s retirement plan.

The court noted that the taxpayer’s job was structured in a way that she could not have worked enough hours to qualify to participate in the employer’s retirement plan, she had a zero balance in the plan, and she obtained no tax benefit from her employer’s plan. However, the Tax Court–pursuant to the regulations–concluded that the taxpayer was not entitled to deduct her IRA contribution because she was in fact an “active participant” in her employer provided retirement plan.

This holding may be techically correct; however, it seems unjust. The policy underlying the IRA tax deduction is to encourage taxpayers who are not saving for retirement to save for retirement, with the hope that these savings will reduce the taxpayer’s future dependence on the government during the taxpayer’s retirement years.