Tax Deduction for Traditional Individual Retirement Accounts

Contribution Limits for 2016 and 2017 and How the Phase-Out Works

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Contributing money to a traditional individual retirement account will not only help you make ends meet in your golden years, but it will also reduce your taxable income. Contributions to traditional IRAs can be made as late as the first due date of a tax return to count toward the year for which you're filing.

Dollar Limits for Contributions to an Individual Retirement Account

You can contribute to a traditional IRA, a Roth IRA or both.

Your total annual contributions for either traditional or Roth IRAs cannot exceed the lesser of your earned income for the year or the annual maximum amount.

IRA Contribution Limits
Year20162017
Maximum Regular Contribution$5,500$5,500
Maximum Catch-Up Contribution$1,000$1,000
Total maximum contribution$6,500$6,500
Contributions due byApril 18, 2017April 18, 2018
Source:IR-2015-118IRS

 

Contribution Requirements 

Regular contributions can be made by anyone under age 70.5 provided he has earned income. Catch-up contributions can be made by persons age 50 or older with earned income. Roth IRAs have no age restrictions.

For IRA purposes only, earned income consists of wages reported on a W-2, self-employment income from a business or farm, and alimony.

The IRS explains:

"To contribute to a traditional IRA, you must be under age 70½ at the end of the tax year. You, and/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. Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes."

Deadlines for Making Contributions

You can contribute funds to your traditional or Roth IRA at any time during the calendar year, and you can also make contributions to an IRA by the first deadline for your tax return, not counting any extensions you might take. IRA contributions for tax year 2016 were due by April 18, 2017, and IRA contributions for tax year 2017 are due by April 18, 2016.

The tax due date is extended in both years because April 15 falls on a weekend followed by a one or more holidays. 

Where to Claim the Tax Deduction

Report your tax deductible IRA contribution directly on the first page of Form 1040 or Form 1040A. You don't have to itemize to claim this deduction. It's an adjustment to income, so you can take it in addition to itemizing or claiming the standard deduction for your filing status.

IRA Deduction Can Phase Out or Is Eliminated Based on Income

Contributions to a traditional IRA might be fully deductible, partially deductible or entirely nondeductible depending on whether you and/or your spouse are covered by a retirement plan through your employer. If a taxpayer is covered by a retirement plan at work, his income determines whether his IRA deduction will be limited. Retirement plans at work include 401(k) plans, 403(b) plans and pensions.

Use a modified adjusted gross income formula to measure income for the purpose of figuring out how much can be deducted for traditional IRA contributions. The IRS explains the formula this way: 

Modified adjusted gross income is adjusted gross income (AGI) figured without the IRA deduction, after including any taxable Social Security benefits, after applying the passive activity loss limitations to passive income, and the following modifications:

+ Exclusion for savings bond interest

+ Adoption assistance excluded from income

+ Deduction for domestic production activities

+ Deduction for interest paid on student loans

+ Deduction for tuition and fees

+ Foreign earned income exclusion, housing exclusion and housing deduction.

Use Worksheet 1-1 in Publication 590-A, Contributions to Individual Retirement Arrangements, available in pdf format on the IRS Web site, to calculate your modified AGI.

You can figure out if your IRA deduction might be limited by using the charts below after you've determined your modified AGI. 

 

2016 Limitations on Deduction for Traditional IRAs
if Covered by Retirement Plan at Work
FilingModified AGI
Statusfromto
Single$61,000$71,000
Head of Household61,00071,000
Qualifying Widow/er98,000118,000
Married Filing Separately & the spouses do not live apart all year-0-10,000
Married Filing Separately & the spouses do live apart all year61,00071,000
Married Filing Jointly: for a spouse who is covered by a retirement plan98,000118,000
Married Filing Jointly: for a spouse who is not covered by a retirement plan and the other spouse is covered183,000193,000
Is your modified AGI less than the "from" amount?In between these amounts?More than the "to" amount?
full deductionpartial deductionno deduction

 

2017 Limitations on Deduction for Traditional IRAs
if Covered by Retirement Plan at Work
FilingModified AGI
Statusfromto
Single$62,000$72,000
Head of Household62,00072,000
Qualifying Widow/er99,000119,000
Married Filing Separately & the spouses do not live apart all year-0-10,000
Married Filing Separately & the spouses do live apart all year62,00072,000
Married Filing Jointly: for a spouse who is covered by a retirement plan99,000119,000
Married Filing Jointly: for a spouse who is not covered by a retirement plan and the other spouse is covered184,000194,000
Is your modified AGI less than the "from" amount?In between these amounts?More than the "to" amount?
full deductionpartial deductionno deduction

Tax Planning Tips

  • Figure out if contributing to a traditional IRA will be fully deductible, partially deductible or nondeductible.
  • If some of your traditional IRA contribution is nondeductible, consider contributing the deductible portion to a traditional IRA and the remaining non-deductible portion to a Roth IRA if you're eligible. 
  • If all your traditional IRA contribution is not deductible, you might want to contribute to a Roth IRA instead.
  • If you're not eligible for a Roth IRA either, consider whether contributing nondeductible funds to a traditional IRA makes sense for your situation. Nondeductible IRAs still provide for tax-free distributions of the original contribution and taxable distributions of earnings. In some situations, nondeductible IRAs can be rolled over tax-free to a Roth IRA.