Whether or not you can take a tax deduction for your or your spouse's traditional IRA contribution depends primarily on three factors:
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. 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:
|If Your Filing Status Is...||And Your Modified AGI Is...||Then You Can Take...|
|single or||$65,000 or less||a full deduction up to the amount of your contribution limit.|
|head of household||more than $65,000 but less than $75,000||a partial deduction.|
|$75,000 or more||no deduction.|
|married filing jointly or qualifying widow(er)||$104,000 or less||a full deduction up to the amount of your contribution limit.|
|more than $104,000 but less than $124,000||a partial deduction.|
|$124,000 or more||no deduction.|
|married filing separately||less than $10,000||a partial deduction.|
|$10,000 or more||no deduction.|
|If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.|
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
|2020 Roth IRA Income Limits|
|Filing Status||Modified AGI||Contribution Limit|
|Married filing jointly or qualifying widow(er)||Less than $196,000||$6,000 ($7,000 if you're age 50 or older|
|$196,000 to $205,999||Reduced|
|$206,000 or more||Not eligible|
|Single, head of household, or married filing separately (and you didn't live with your spouse at any time during the year)||Less than $124,000||$6,000 ($7,000 if you're age 50 or older|
|$124,000 to $138,999||Reduced|
|$139,000 or more||Not eligible|
|Married filing separately (if you lived with your spouse at any time during the year)||Less than $10,000||Reduced|
|$10,000 or more||Not eligible|
Tax Credit for IRA Contributions
You must also make a retirement plan or IRA account contribution, and fall under maximum adjusted gross income caps the IRS sets each year.
If your adjusted gross income is above any of these thresholds in 2019, you aren’t eligible for the saver’s credit:
• $64,000 as a married joint filer
• $48,000 as a head of household filer
• $32,000 as any other filing status
The income thresholds for the credit change each year to keep pace with inflation. You can find the income limits for the current tax year in the table below.
|2020 SAVER’S CREDIT INCOME LIMITS|
|Credit Amount||Single||Head of Household||Joint Filers|
|50% of contribution||AGI of $19,500 or less||AGI of $29,250 or less||AGI of $39,000 or less|
|20% of contribution||$19,501 – $21,250||$29,251 – $31,875||$39,001 – $42,500|
|10% of contribution||$21,251 – $32,500||$31,876 – $48,750||$42,501 – $65,000|
|0% of contribution||more than $32,500||more than $48,750||more than $65,000|