Maximum income level for Roth IRA include capital gains from trading s

[Guest andrewg]

My wife and I have a Roth IRA account and together we were under the income threshold to establish a Roth IRA. I was laid off a month ago and started trading stocks for myself and did better than I ever expected - and I have realized some gains that would put us beyond the Roth threshold. Does stock trading income in the last month of the working year count towards my regular income or do I not have anything to worry about if it is simply short term gains? My regular job before was an analyst and not a trader. Thanks for any advice!

[Michael Devault]

Eligibility to contribute to a Roth IRA is based on Modified Adjusted Gross Income, which is the Adjusted Gross Income on your 1040, plus certain deductions and exclusions, such as foreigh earned income, traditional IRA deductions, etc.

Since AGI includes capital gains & losses from Schedule D, it would seem that your trading income would have to be considered in determining your eligibility to contribute to a Roth IRA.

For more information, you might want to check the IRS' web site and download Publication 590. The current version has been updated for 1999 returns.

Hope this helps.

[John G]

Andrew, the prior answer was correct, all gains/losses both long and short will be reported on Sched D and the first page of your 1040. If you are close to the income threshold for a Roth, you may still get to qualify. First, take any tading losses you may have to offset gains. Second, you have the option to file a Sched C business activity as a "trader". Regular long term investors do not have this option, but what you have described may qualify as a business activity of "trading". You still report your gains/losses, but you can write off business related expenses such as computer, software, fax, answer machine, cell phone, copier, office furniture.... perhaps even a car. You can use the Sec 179 expense option to immediately write off up to $19,000 in 1999. Talk to your accountant before you act on this.

[This message has been edited by John G (edited 12-17-1999).]

[BPickerCPA]

John,

I believe if you look at the rules for who qualifies as a "trader", Andrew will not qualify. I recall that there is some sort of election for trader status, and that deadline is passed.

[John G]

BPicker, You comments caught me by surprise.

My information dates back to around 1994 or so, my only documentation from that period are four xerox pages referenced at the bottom as copyright Tax Management Inc, a subsidiary of the Bureau of Nation Affairs Inc. I will condense the material as follows:

Detailed Anaysis

II Status of Taxpayer as Dealer, Trader, or Investor

The tax consequences of the transactions discussed in this portfolio may differ significantly depending on whether they are carried out by (1) a dealer, (2) a trader, or (3) an investor......

The regulations thus clearly recognize that a person may be engaged in the trade or business of buying and selling securities without attaining dealer status.....

(cites Supreme Court rulings)... [the taxpayer] "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose in engaging in the activity must be for income or profit".....

While the trader status does not transform gains and losses from sales and exhanges of securities into ordinary income and loss, the trader's expenses relating to his trade or business are full deductible "above the line" items. Thus, unlike an investor, a trader's expense, including subscriptions..[long list] are deducted in determining adjusted gross income rather than as itemized expenses.

end of extract

The general direction of this material is that you are investor if you hold long term (Yeager Est. v. Comr. TC memo 1988-264, aff'd, 1989-2 USTC 9633 2nd Cir 11/19/89 was cited). You are a trader if this is your primary activity, hold short term, make lots of trades and do it for profit. (print to small and blurry to see citations here)

That describes me in the early 1990s. I thought that since Michael did not have a conventional job that he also might qualify. My CPA ran it up a few flagpoles before he agreed with the Sched C trader option. I not aware of any election requirement. My layperson view is that trading can be a business like any other, the main problem would appear to be distinguishing it from more conventional investing. With the late 1990s internet trading, I would not be surprised that the IRS has tried to further define the occupation.

Any of you CPAs have daytrader clients? I would like to hear more on this topic.

[This message has been edited by John G (edited 12-17-1999).]

[BPickerCPA]

There is the initial question as to whether "starting a month ago" qualifies a person as a trader. But more to the point, there was a little noticed law change, I believe in the '97 tax act that affected the question of trader vs investor.

I am not all that familiar with; I'm only aware it's there. Since I don't deal with day traders, I haven't had to get that involved.