Tax Deduction for Traditional Individual Retirement Accounts

Contribution limits for 2014 and 2015, and how the phase-out works

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

Dollar Limits for Contributions to an Individual Retirement Account

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

IRA Contribution Limits
Year20162015
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 15, 2017April 18, 2016
Source:IR-2015-118IR-2014-99

 

  • Regular contributions can be made by persons under age 70.5 years old with earned income.
  • Catch-up contributions can be made by persons age 50 or older with earned income.

 

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.

The Age Requirement for Traditional IRAs

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 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.

Source: Tax Topic 451, Individual Retirement Accounts, IRS.gov

Deadlines for Making Contributions

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.

  • IRA contributions for tax year 2016 are due by April 15, 2017.
  • IRA contributions for tax year 2015 are due by April 18, 2016.

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 need to itemize to report this deduction.

  • 2015 Form 1040A: Line 17
  • 2015 Form 1040: Line 32

IRA Deduction Phases Out or 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, then we need look at a person's income to see whether their IRA deduction will be limited. Retirement plans at work include 401(k) plans, 403(b) plans, and pensions.

When measuring income for the purpose of figuring out how much can be deducted for traditional IRAs, we use a modified adjusted gross income formula.

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.

We use Worksheet 1-1 in Publication 590-A, Contributions to Individual Retirement Arrangements (available in pdf format on the IRS Web site) to calculate a person's modified AGI.

Once you know your modified AGI, you can figure out if your IRA deduction might be limited by using the chart below.

2015 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

 

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

 

Tax Planning Tips

  • Figure out if contributing to a traditional IRA will be fully deductible, partially deductible or non-deductible.
  • 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).
  • 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 provide for tax-free distributions of the original contribution and taxable distributions of earnings. And in some situations, nondeductible IRAs can be rolled over tax-free to a Roth IRA.

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