Individual retirement accounts, or IRAs, are tax-deferred, meaning that you do not have to pay tax on any interest or other gain the account earns until you withdraw the money. Depending on the income, the Internal Revenue Service (IRS) may restrict who can claim a tax deduction for contributions to traditional IRAs.
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Generally, everyone is eligible to make contributions to a traditional IRA, but a tax deduction for those contributions may not always be available. If you or your spouse is a person eligible for the IRA, you may need to reduce or completely eliminate your IRA deduction.
- contributes to an employer-sponsored retirement plan, such as a 401(k) or 403(b), and
- your Modified Adjusted Gross Income (MAGI) exceeds annual limits.
If you and your spouse are not eligible to participate in an employer plan, you may deduct your contribution as long as you earn income during the year. Interest, dividends, and other types of investment income are among the deductions.
If your MAGI is too high, the IRS may limit the amount you can deduct each year. This amount may also be subjected to a reduction. The IRS may provide a spreadsheet with your tax return instructions to assist you calculate your deduction.
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TurboTax, a tax software, can help you decide whether your IRA contributions are deductible and how much you can deduct.
The IRS has classified the IRA deduction as an above-the-line deduction, which means you may take it irrespective of whether you select or claim the standard deduction. This deduction reduces your taxable income for the year, which has ultimately reduced the amount of income tax you pay.
Consider these alternatives if you cannot make a tax-deductible contribution to a traditional IRA.
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