A tax deduction is always good news, even if it's just a few hundred dollars. After all, reducing your gross income means reducing your taxes. In the case of a traditional IRA, if you contribute the yearly limit, you may have a chance to deduct thousands of dollars. Whether you can deduct the full amount of your yearly contribution depends on whether you and/or your spouse take part in a retirement plan at work.
No Employer Plan
If neither you nor your spouse participates in an employer-sponsored retirement plan, you are entitled to deduct the full amount of your traditional IRA contribution from your gross income when you file your tax return. (This is true whether one of you works or both of you work.) This rule also applies to single tax filers. If you are married but never lived with your spouse during the tax year, the IRS considers you as single relative to IRA contribution deductibility. Consequently, you can deduct the full amount.
Employer Plan Participant -- Married Filing Jointly
If you take part in an employer-sponsored retirement plan, your eligibility to deduct IRA contributions depends on your modified adjusted gross income. You arrive at your modified adjusted gross income by adding back certain deductions to your adjusted gross income, which is the figure at the bottom of page 1 of IRS Form 1040. (Complete instructions on calculating MAGI can be found in Form 1040 and 1040A instructions, as well as in IRS Publication 590.)
As of tax year 2012, if you file your taxes jointly and your MAGI is $92,000 or less, you can deduct the full amount of your IRA contribution. If the figure lies between $92,000 and $112,000, you are eligible for a partial deduction. With a MAGI of $112,000 or more, eligibility to deduct is eliminated.
Spouse Employer Plan Participant -- Married Filing Jointly
As of 2012, if your spouse participates in a retirement plan at work and you do not, eligibility rules are as follows: With MAGI of $173,000 or less, you can deduct the entire amount of your IRA contribution. If your MAGI is between $173,000 and $183,000, you are eligible for a partial deduction. A modified adjusted gross income of $183,000 or more disqualifies you from the deduction.
Employer Plan Participant -- Married Filing Separately
If you or your spouse is covered by an employer-sponsored retirement plan and you file your taxes separately, you can only deduct your traditional IRA contributions if your modified adjusted gross income is less than $10,000. If it is greater, you lose the deduction.
How the Rules Apply
The IRA deductibility rules apply to each taxpayer individually. Following are examples of how the rules apply to taxpayers who are married filing jointly, one or both of whom participates in an employer-sponsored plan:
If both of you participate in an employer-sponsored plan, both of you are subject to the $92,000 to $112,000 limits. So if you calculate your MAGI to be $90,000, you can both deduct your IRA contributions that year. If the MAGI is $95,000, you will each be eligible for a reduced deduction. With a MAGI of $115,000, neither of you can take the deduction.
If, on the other hand, a husband contributes to a plan at work, but his wife does not -- whether she works or not -- the husband is subject to the $92,000 to $112,000 limits. The wife's eligibility to deduct is subject to the $173,000 to $183,000 limits.
So, if their MAGI is $90,000, they can both deduct their IRA contributions that year. if their MAGI comes to $140,000, the husband cannot deduct his traditional IRA contribution because $140,000 is greater than $112,000. The wife can take the deduction because $140,000 is less than $173,000. If their MAGI is $195,000, neither gets the deduction.
Roth IRA -- Contributions Not Deductible
You cannot deduct all or part of any contribution to a Roth IRA. The account type accepts only money that has been taxed.
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- Non-Working Spouse IRA Deduction
- Can I Contribute to a Roth IRA After Maxing Out My 401(k)?
- How to Verify Your Income Against the Contribution Limits to an IRA
- How Much to Add to an IRA to Decrease Your AGI