Many taxpayers can take a deduction for money they contribute to a traditional IRA each year, but it depends on some rules. You must have earned income to qualify, and certain types of IRAs aren't eligible. The Internal Revenue Service (IRS) 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 Roths are tax-free after retirement, because you don't get a tax break on the money at the time you contribute it. You can't take a tax deduction for contributions to a Roth IRA.
Unlike Roth accounts, traditional IRA distributions are taxed when they're withdrawn.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 IRA contributions. Interest and dividend income and earnings from property, such as rental income, do not count.
You and your spouse can take an IRA deduction regardless of how much you earn. There are no caps on income, but your IRA deduction is subject to income limitations if you or your spouse are also participants in an employer-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. This is usually April 15.
The IRS extended the tax filing deadline from April 15, 2021, to May 17, 2021. Therefore you'd have until May 17, 2021, to make contributions for the 2020 tax year.
Annual Contribution Caps
You can take an IRA deduction for up to $6,000 in contributions in 2021 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. They were $5,500 and $6,500 for tax years 2015 through 2018.
You can't contribute more than your annual earnings. These limits apply to all IRA accounts that you hold. They're not $6,000 or $7,000 for each IRA—they're $6,000 or $7,000 for all of your accounts collectively.
Spousal IRA Contributions
You can make a spousal IRA contribution—a contribution for your non-working spouse—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.
You'd be entitled to $7,000 in deductible contributions for each of you for a total of $14,000 if you and your unemployed spouse are age 50 and older.
If You Have an Employer-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 receives any contributions at all in a given year, even if all the contributions were made by the employer. In this case, your ability to deduct your IRA contribution breaks down like this:
- The IRA deduction is phased out if you have between $66,000 and $76,000 in modified adjusted gross income (MAGI) as of 2021 if you're single or filing as head of household. You'll be entitled to less of a deduction if you earn $66,000 or more, and you're not allowed a deduction at all if your MAGI is over $76,000.
- The IRA deduction is phased out between $105,000 and $125,000 if you're married and filing jointly as of 2021, or if you're a qualifying widow(er). Those with MAGIs over $125,000 aren't allowed a deduction.
These limits plunge significantly for married taxpayers who file separate returns. They're limited to a partial deduction in 2021 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 certain other deductions you might have taken back to your adjusted gross income (AGI), 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 when calculating your MAGI, 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 2021 if you're not a participant employer-sponsored plan but your spouse is, and if your household income falls below certain ranges.
The deduction is phased out between $198,000 and $208,000 of adjusted gross income in 2021 for taxpayers who are married and filing jointly when one spouse is a company retirement plan participant. A modified AGI over $208,000 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 this 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 2020 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 10a of Form 1040.
These lines and forms apply to the 2020 tax return, the one you'll file in 2021. The IRS has redesigned the 1040 tax return three times 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.
Frequently Asked Questions (FAQs)
What is the minimum IRA contribution that's tax-deductible?
Any amount of IRA contribution is tax-deductible. You don't have to maximize your contributions to enjoy tax benefits. The only requirement—for those whose earned income falls below the contribution limit—is that you don't deduct more than you earn in a year.
How do you report an excess IRA contribution?
If you accidentally exceed your IRA contribution limit, but you catch it before you file taxes for that tax year, then you don't have to report it to the government. You can simply contact the financial institution that holds your IRA and ask them to withdraw the excess amount. However, if your contributions were invested and gained value while in your IRA, you will have to claim that income on your 1099, and this could come with a 10% penalty tax if you're younger than 59½.