Are You Eligible for the IRA Deduction? It Depends
Your ability to take an IRA deduction is subject to the limitations below.
Many taxpayers can take an IRA deduction for the amounts they contribute to a traditional IRA each year, but it can depend on some rules. You must have earned income to qualify, and certain types of IRA accounts aren't eligible. The Internal Revenue Service also sets a cap on the total amount of contributions that can be deducted.
What IRAs Are Eligible?
You can claim a deduction for traditional IRA contributions, but not for Roth IRA contributions. Roth accounts are treated differently for tax purposes. Withdrawals from Roth IRAs are tax-free after retirement because you don't get a tax break on the money you contribute—you can't take a tax deduction at that time.
Traditional IRA distributions are taxed when they're withdrawn.
SEP, SIMPLE, and SARSEP IRA plan contributions are deductible, but these can be subject to slightly different rules. These guidelines apply only to traditional IRAs.
You must have earned income to make an IRA contribution. Investment income doesn't count, although rental income does.
You and your spouse can take an IRA deduction regardless of how much you earn. There are no caps on income. Your IRA deduction is subject to income limitations, however, if you or your spouse are participants in a company-sponsored retirement plan.
The deadline for making deductible contributions is tax day of the year following the tax year in which you're claiming them, usually April 15 unless this date falls on a weekend or a holiday.
You'd have until April 15, 2020, to make contributions for the 2019 tax year.
Annual Contribution Caps
You can take an IRA deduction for up to $6,000 in contributions made to a traditional IRA as of 2019 and 2020 if you're age 49 or under. This increases to $7,000 if you're age 50 or older.
These limits can increase annually, although they don't always do so. For example, they were set at $5,500 and $6,500 for tax years 2015 through 2018.
These limits aren't subject to reduction based on your annual earnings, but you can't contribute more than you earn.
Spousal IRA Contributions
You can make an IRA contribution for a non-working spouse, referred to as a spousal IRA contribution if you have enough earned income to cover the contributions in addition to your own. And yes, you can claim an IRA deduction for doing so.
For example, let's say that you and your unemployed spouse are each age 51. You're therefore entitled to $7,000 in deductible contributions for each of you for a total of $14,000. You must have at least $14,000 in earnings to qualify.
If You Have a Company-Sponsored Retirement Plan
Your IRA deduction can be limited if you also contribute to a company-sponsored retirement plan. It depends on the amount and the type of income you report.
A taxpayer is considered to be a participant in a company-sponsored retirement plan if their account balance received any contributions at all in a given year, even if all contributions were made by the company.
In this case, your ability to deduct your IRA contribution on your tax returns breaks down as follows:
- The IRA deduction is phased out if you have between $65,000 and $75,000 in modified adjusted gross income (MAGI) as of 2020 if you're single or filing as head of household. You'll be entitled to less of a deduction if you earn $65,000 or more, and you're not allowed a deduction at all if your MAGI is over $75,000.
- The IRA deduction is phased out between $104,000 and $124,000 if you're married and filing jointly in 2020, or if you're a qualified widower. MAGIs over $124,000 are not allowed a deduction.
These limits plunge significantly for married taxpayers who file separate returns. They're limited to a partial deduction in 2020 for MAGIs up to $10,000. There's no deduction over this income threshold.
You can calculate your MAGI for purposes of claiming the IRA deduction by adding back to your adjusted gross income (AGI) certain other deductions you might have taken, including the student loan interest deduction, the domestic production activities deduction, and the tuition and fees deduction. You must also add back certain income exclusions, including foreign earned income and housing, employer adoption benefits, and savings bond interest.
If Your Spouse Has a Company Retirement Plan
The IRS allows a full deduction up to the contribution limits in 2020 if you're not a participant but your spouse is and your household income falls below certain ranges.
For 2020, the deduction is phased out between $196,000 and $206,000 of adjusted gross income for taxpayers who are married and filing jointly when one spouse is a company retirement plan participant. A modified AGI over $206,000 allows for no deduction.
How to Claim the Deduction
The IRA deduction is an "above the line" adjustment to income, and that's a good thing. You don't have to itemize to claim it. You can take the deduction and itemize, too, or you can take it and claim the standard deduction.
Enter the amount on line 19 of Schedule 1 of the 2019 Form 1040, and file the Schedule with your tax return. Schedule 1 covers numerous adjustments to income. The total of all of them will transfer to line 8a of Form 1040.
These lines and forms apply to the 2019 tax return, the one you'd file in 2020. The IRS has redesigned the 1040 tax return twice since 2017, so this information won't necessarily appear in the same place on other years' returns.
Non-Deductible IRA Contributions
You can still make contributions even if you're not eligible for the IRA deduction. This is called a non-deductible IRA contribution, and the funds inside the account will grow tax-deferred until a distribution occurs.