Traditional IRA Deduction
If you make contributions to a traditional IRA, you may be able to take an IRA deduction.
The idea behind the IRA deduction, of course, is to encourage people to save for retirement with the added benefit of tax deferral. There is also the added appeal that contributions could help reduce taxable income.
Keep in mind that whether or not your contribution is tax-deductible shouldn’t be the only consideration in choosing an IRA. Before deciding, you should also weigh in on factors like required minimum distributions (RMDs) and taxes on withdrawals.
Who Can Make An IRA Contribution
A traditional individual retirement arrangement (IRA) is a personal savings plan that allows a taxpayer to accumulate money tax deferred. Contributions to a traditional IRA may or may not be deductible, depending on whether the individual (or spouse) participates in an employer retirement plan and if so, the amount of Adjusted Gross Income (AGI). The earnings on a traditional IRA are taxed when they are distributed.
For 2015, IRA contributions cannot exceed the lesser of $5,500 or earned income. If you are 50 or older as of year-end, an additional catch-up contribution of up to $1,000 is allowed. Thus, the 2015 contribution limit for these taxpayers is the lesser of $6,500 or earned income.
For IRA purposes, earned income includes wages and other compensation from employment and also includes alimony and separate maintenance payments. If you were a member of the U.S. Armed Forces, earned income includes any nontaxable combat pay you received. If you were self-employed, earned income is generally your net earnings from self-employment if your personal services were a material income-producing factor.
Unfortunately, any earned income excluded with the foreign earned income exclusion doesn’t count. Nor, does it include pensions or annuities, social security benefits, deferred compensation, partnership income that is not SE income, S-Corporation income from Schedule K-1, rental income, etc.
Who Can Make An IRA Deduction
You may be able to claim a deduction on your individual federal income tax return for the amount you contributed to your IRA.
If you (and your spouse) were not covered by an employer-sponsored retirement plan at any time during the year, contributions to a traditional IRA are fully deductible. However, if you (or your spouse) were covered by an employer retirement plan, the amount of the traditional IRA contribution that is deductible depends on your filing status, amount of modified AGI and, if married, coverage status.
See IRS Publication 590-A to determine how much is deductible for you.
The limits on the amount you can deduct don’t affect the annual amount you can contribute. However, you can never claim a tax deduction for more than what you contributed to your IRA that year.
ROTH IRA Deduction
Roth IRA contributions are never qualify for an IRA deduction.
When Is The IRA Deduction Deadline
You can generally make an contribution right up until Tax Day (generally April 15) and have it count for the prior taxable year. So, for example, for tax year 2015, you can make a contribution until April 15, 2016. Be sure to tell your IRA trustee that the contribution is for the prior tax year (i.e. 2015).
How To Report Your IRA Deduction
See IRS Publication 590-A , for additional information, including how to report your IRA contributions on your individual federal income tax return.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
If you would like a quote, please click on the button below for a free, no obligation Tax Preparation quote and/or free 30-minute consultation to discuss your situation regarding an IRA deduction further:
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.