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Tax Deduction for Traditional Individual Retirement Accounts

Contributing savings to a Traditional IRA can result in a tax deduction

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You can reduce your taxable income by contributing money to a traditional individual retirement account (IRA). Contributions to IRAs can be made as late as the first due date of a tax return and can be considered retroactive to the previous tax year.

 

Limits for the IRA Deduction

Your can contribute to a traditional IRA or Roth IRA or both. Your total contributions to either plan cannot exceed the lesser of your earned income for the year, or the annual maximum amount.

 

For the year 2014, the dollar limits for IRA contributions are:

  • $5,500 if you are age 49 or younger,
  • $6,500 if you are age 50 or older

For the year 2013, the dollar limits for IRA contributions are:

  • $5,500 if you are age 49 or younger,
  • $6,500 if you are age 50 or older
For tax years 2008, 2009, 2010, 2011, and 2012 the dollar limits for IRA contributions were:
  • $5,000 if you are age 49 or younger,
  • $6,000 if you are age 50 or older

Persons age 50 or older are permitted to contribute an additional $1,000 catch-up contribution.

The Earned Income Requirement for IRAs

To be eligible to fund an IRA for a particular year, you will need to have earned income. For IRA purposes only, earned income consists of wages (reported on a W-2), self-employment income from a business or farm, and alimony. You also must be under age 70.5 years old to contribute to a traditional IRA. (Roth IRAs, by contrast, have no age restrictions.) The IRS explains:
"To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes."
Source: IRS Tax Topic 451, Individual Retirement Accounts

 

Deadlines

You can contribute funds to your traditional or Roth IRA at any time during the calendar year, and you can make contributions to an IRA by the first deadline for your tax return without any extensions. That means you can make a contribution to your IRS for the year 2012 by April 15, 2013.

 

Where to Claim the Tax Deduction

Report your tax deductible IRA contribution directly on Form 1040 or Form 1040A. You don't need to itemize to report this deduction.

 

IRA Deduction Reduced or Eliminated based on Income Phaseouts

Contributions to a traditional IRA might be fully deductible, partially deductible or entirely nondeductible, depending on factors such as your age, total income, marital status, filing status and whether you or your spouse are covered by a retirement plan through your employer.

If you are covered by a retirement plan at work, such as a 401(k) or a 403(b) plan, then your IRA contributions might be fully deductible, partially deductible, or not deductible at all. The answer depends on your income level for the year (as measured by a modified adjusted gross income formula).

For 2014 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work are as follows:

  • For single filers: $60,000 to $70,000
  • For head of household filers: $60,000 to $70,000
  • For married couples filing jointly and the spouse who makes the IRA contribution is covered by a workplace retirement plan: $96,000 to $116,000
  • For married couples filing jointly and the spouse who makes the IRA contribution is not covered by a workplace retirement plan and is married to someone who is covered: $181,000 to $191,000.
  • For married couples filing separately: $0 to $10,000

For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work are as follows:

  • For single filers: $59,000 to $69,000
  • For head of household filers: $59,000 to $69,000
  • For married couples filing jointly and the spouse who makes the IRA contribution is covered by a workplace retirement plan: $95,000 to $115,000.
  • For married couples filing jointly and the spouse who makes the IRA contribution is not covered by a workplace retirement plan and is married to someone who is covered: $178,000 and $188,000
  • For married couples filing separately: $0 to $10,000

For 2012 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work were as follows:

  • For single filers: $58,000 to $68,000
  • For head of household filers: $58,000 to $68,000
  • For married couples filing jointly and the spouse who makes the IRA contribution is covered by a workplace retirement plan: $92,000 to $112,000.
  • For married couples filing jointly and the spouse who makes the IRA contribution is not covered by a workplace retirement plan and is married to someone who is covered: $173,000 to $183,000
  • For married couples filing separately: $0 to $10,000
If your income for the year is below the phaseout limits, your IRA contribution is fully tax-deductible. If your income falls within the phase out range, your IRA contribution will be partially deductible. If your income falls above the phase out range, none of your IRA contribution will be deductible.

Tax Planning Tips

If all your traditional IRA contribution is not deductible, you might want to contribute to a Roth IRA instead. Nondeductible IRAs provide for tax-free distributions of the original contribution and taxable distributions of earnings.

If some of your traditional IRA contribution is not-deductible, consider contributing the deductible portion to a Traditional IRA and the remaining non-deductible portion to a Roth IRA (if eligible).

Additional Information:

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