If you contribute to an Individual Retirement Account during the year, you might be eligible for a tax deduction for the amount contributed. This deduction is taken on line 32 of Form 1040, the annual federal income tax return. To know whether you can get the tax benefits of an IRA deduction, you have to do some math.
The IRA Deduction Work Sheet
In your 1040 instruction pack, you will find a work sheet called the "IRA Deduction Work Sheet- line 32." The work sheet walks you through the calculation. Input your income and that of your spouse, if you are filing jointly. If you or your spouse were covered by another type of retirement plan, such as a 401(k), your IRA deduction may be reduced or lost altogether. Your final allowable deduction is calculated on lines 12a and 12b of the work sheet. Transfer the sum of these two figures to line 32 on your 1040.
Eligibility for IRA Deductions
Not everyone can take a deduction for IRA contributions even if they contributed during the year. To be eligible for the deduction, you must not turn 70 1/2 years old during the year. Deductions are limited to contributors younger than this age. You must also have contributed to a traditional IRA, rather than a Roth IRA. A Roth does not get a deduction when the contributions are made. If you meet both of those criteria, you can contribute up to $5,500 a year if you are under 50 or $6,500 a year if you are older than 50 but younger than 70 1/2 and get a deduction.
Line 32 -- your allowable IRA deduction -- adjusts your gross income downward and makes less of it taxable. For example, if you earned $25,000 in the year and contributed $5,000 to a traditional IRA, you will only pay tax on $20,000. If you have already had income taxes withheld by an employer, this can create or increase a refund at the end of the year.
If, after completing the work sheet, you find out that you have contributed too much during the year to your IRA, the IRS gives you a period of time to correct it. You have until the tax filing deadline, April 15 in most years, to remove any excess IRA contributions without penalty. It's important to calculate your allowable deduction long before this deadline because any excess contributions left in the plan after this date will incur a 6 percent annual penalty.