Everyone advised you to get an IRA to save money on your taxes, but no one told you where or how to deduct the amount you invested. In fact, once you began to investigate, you found there were two different types of IRAs and one wasn't deductible. Before you begin, make sure the IRA you invested in wasn't a Roth IRA or your effort to deduct it is in vain. The Roth grows tax-free and you remove the funds tax-free -- but you can't take it off your taxes. The IRA must be a traditional plan.
Before you begin to hunt for that elusive IRA deduction area, make sure your deduction is within the appropriate limits. For the tax year 2010, you can invest and deduct up to $5,000 if you're under 50 years old and $6,000 if you're 50 or older. That is, of course, if you don't have another retirement plan or do but fall within specified income limits.
If you have a retirement plan at work and want to invest in a traditional IRA, you have limitations. If you're single, you must make $56,000 or less to take the full deduction. Once your income hits $56,000, the amount the government allows you to deduct phases out until it disappears at $66,000. The same is true for married people filing jointly and qualifying widows or widowers only their limit is $89,000 for a full deduction with the complete phase out at $109,000. If you're married filing separately, you're pretty well bamboozled because you can't make over $10,000 to receive a deduction if you have an employer-sponsored pension.
Timing is everything, especially when it comes to IRS matters. Luckily, you don't have to invest it in the same year as you earned your income. That way, if you find you need to reduce the amount of tax you pay, you simply make the investment into the traditional IRA. When you invest in an IRA for the previous tax year, you must do it before you file your taxes or before April 15 of the year following the tax year, if that's earlier.
Each type of 1040 tax form offers a different spot for your deduction. If you use for 1040EZ, there's no spot to deduct an IRA. You have to use form 1040 where you list the deduction on line 32 or form 1040A where you list it on line 17.
- If you get a distribution from another IRA or qualified pension and need to show that you put it into a rollover IRA, go to lines 11 or 12 on 1040A and lines 15 or 16 on 1040. Simply record the amount shown on your 1099-R where it requests the amount of the distribution and then show zero as the taxable amount in the section b on that line.
- Limits for 403(b) & Traditional IRA Contributions
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- Do I Report a Roth IRA Contribution on a 1040?
- Does Contributing to an IRA Affect Financial Aid?
- Can IRA Contributions Be Itemized?
- Can a Sole Proprietor SEP Plan Still Make Traditional IRA Contributions?
- Can I Deduct My IRA Contribution If I Can Participate in a 401(k)?
- Can I Contribute to My IRA Annuity If I Already Contribute to a SIMPLE IRA?
- How to Determine Your Reduced Roth IRA Contribution Limit
- Recommended IRA Contribution Percentage