Whether or not you can take a tax deduction for your or your spouse's traditional IRA contribution depends primarily on three factors:
- Whether you or your spouse are covered by an employer retirement plan
- Your (and your spouse's) modified adjusted gross income
- Your (and your spouse's) income tax filing status
Who Is Covered by an Employer Retirement Plan?
An employer plan includes a qualified pension, profit sharing, stock bonus, 401(k), and/or money-purchase pension plan. Employer plans also include tax-sheltered annuity plans for employees of public schools and certain tax-exempt organizations, simplified employee pensions (SEPs), SIMPLE plans, and qualified annuity plans.
An individual is covered by an employer plan if he or she is, by definition, an active participant in an employer retirement plan. A covered individual can make contributions to an IRA, but the contribution may not be fully deductible.
To be covered, you must be considered an active participant. Check with your employer to determine the definition of active participant for your retirement plans.
IMPORTANT NOTE: Even if you are covered by an employer's plan for only one day, the deductibility rules will apply to any contributions made during the year. So if your primary reason for contributing to an IRA early in the year is solely to receive a tax deduction, make sure that at some point later on in the year you, or your spouse, are not going to be considered an active participant in a retirement plan.
SUGGESTION: Your annual W-2 Form received from an employer will indicate if you are an active participant in a retirement plan.
IMPORTANT NOTE: If either you or your spouse is covered by an employer plan, you are each subject to certain deductibility limitation rules. See the section Is Your IRA Contribution Tax Deductible? for more information.
What Is Modified Adjusted Gross Income?
If you or your spouse is covered by an employer retirement plan, the tax deductibility of your IRA contribution depends on your modified adjusted gross income and your income tax filing status. Adjusted gross income (AGI) is basically your total income, less net business losses, net allowable capital losses, IRA and Keogh contributions, and alimony. Generally, modified AGI is your AGI computed without subtracting your, or your spouse's, IRA deduction.
Once you know your modified AGI, your participation status in employer qualified plans, and your income tax filing status, you can look at the following table to determine if your IRA contribution is fully deductible, partially deductible, or nondeductible.
If you are single or married and both spouses are either covered by an Employer Plan or both are not covered:
| Income Tax Filing Status |
You (and your spouse) are covered by an Employer Plan
|
|
Married Filing Jointly/ Surviving Spouse
|
Single or Head
of Household
|
Yes
|
No
|
|
Modified Adjusted Gross Income, 2010 (and 2009) Tax Year
|
|
$89,000 or under
(Same in 2009)
|
$56,000 or under
($55,000)
|
Fully deductible
|
Fully deductible
|
|
Between $89,001 and $109,000
(Same in 2009)
|
Between $56,001 and $66,000
($55,001 to $65,000)
|
Partially deductible
|
Fully deductible
|
|
$109,000 or over
(Same in 2009)
|
$66,000 or over
($65,001)
|
Nondeductible
|
Fully deductible
|
If you married and only one spouse is covered by an Employer Plan:
If one spouse is an active participant in an employer plan and the other spouse is not, the non-participant spouse may make a deductible IRA contribution; however, the deduction is phased out in 2010 for couples with modified AGI between $167,000 and $177,000 ($166,000 and $176,000 in 2009). If 2010 modified AGI exceeds $177,000 ($176,000 in 2009), no deduction will be allowed for the spouse of an active participant.
Is Your IRA Contribution Tax-Deductible?
If your filing status is Married Filing Separately (MFS), and you are covered by an employer retirement plan:
If you lived with your spouse during the year, the phase-out range of modified AGI to determine your IRA deduction is $0 to $10,000. If you file a separate return and did not live with your spouse at any time during the year, you are not treated as married for the purpose of these limits, and the applicable dollar limit is that of a single taxpayer.
If your filing status is Married Filing Separately (MFS), and you are not covered by an employer retirement plan:
If you lived with your spouse who is covered by an employer retirement plan, the phase-out range of modified AGI to determine your IRA deduction is $0 to $10,000. However, you are entitled to a full IRA deduction if you did not live with your spouse at any time during the year.
SUGGESTION: A full IRA deduction is available if neither you nor your spouse is covered by a retirement plan during the year, regardless of your modified AGI.
IMPORTANT NOTE: If your IRA contribution is nondeductible, don't forget to file Form 8606, Nondeductible IRA Contributions, with your tax return. This will provide a record of your after-tax contributions so the money can't be taxed a second time when you withdraw it.
SUGGESTION: Deductible IRA contributions are taken on your individual income tax return. Deduct the contributions to your IRA on Page 1 of Form 1040, under the section Adjustments to Income.
Modified adjusted gross income limits that apply to active participants in employer retirement plans for 2009 and 2010 follow:
|
Married Filing Jointly/Surviving Spouse
|
Single or Head of Household
|
|
$89,000 to $109,000
($89,000 to $109,000)
|
$55,000 to $65,000
($56,000 to $66,000)
|
Tax Credit for IRA Contributions
Low to middle income taxpayers may be eligible for a tax credit (also known as the 'saver's credit') for contributions made to a traditional or a Roth IRA. To qualify for the tax credit in 2009 and 2010, adjusted gross income must be less than $55,500 if married filing a joint return, and $27,750 if single, or $41,625 if head of household. The maximum credit rate is 50%, and the maximum contribution amount that may be used for calculating the credit is $2,000. Thus the maximum credit amount is $1,000.
