IRS Rules for Traditional IRA Tax Deductions

One of the benefits of a traditional IRA is that contributions are usually tax deductible. Since the money in a traditional IRA is not taxed until it’s withdrawn, these tax-deductible contributions can grow tax-free for years or even decades. The Internal Revenue Service does set limits on your IRA contributions and how much you can actually deduct on your tax return.

Deductible Contributions

You can usually deduct the contributions you make to a traditional IRA up to the IRS annual contribution limit. The limit is $5,000 per year until you reach age 50, when it increases to $6,000. Your earned income must be at least as much as you contribute. If you are married and file a joint return, each spouse may make deductible contributions to separate IRAs up to the annual limit as long as either you or your spouse has sufficient earned income.

Claiming the Deduction

You can’t use Form 1040EZ if you want to claim a deduction for traditional IRA contributions. If you file using Form 1040, the amount of your deduction for IRA contributions goes on line 32. Enter the amount on line 17 if you are using Form 1040A. Sometimes the deduction for traditional IRA contributions is reduced, as discussed below. If this happens, you can make nondeductible contributions up to the annual limit. If you do make nondeductible contributions, you must register them by completing IRS Form 8606 and attaching it to your tax return.

Reduced Deduction

If you, or your spouse if you are married, are covered by a retirement plan at work, the deduction for traditional IRA contributions may be phased out, meaning it is first reduced and then eliminated entirely. You’ll still be able to make nondeductible contributions. If you are covered by a retirement plan it work and file as single, as of 2012 your deduction started to phase out when your adjusted gross income reached $58,000 and was eliminated when AGI reached $68,000. If you were married and filed jointly, the phase-out range was $92,000 to $112,000. If you were not covered but your spouse was, your deduction for traditional IRA contributions phased out from $173,000 to $183,000. Married taxpayers filing a separate return have a phase-out range of zero to $10,000.

Multiple Accounts

You can have more than one traditional IRA account, as well as Roth IRA accounts. The annual contribution and deduction limits apply to your total contribution to all accounts added together. Only the portion contributed to traditional IRA accounts is tax deductible. Also, you are allowed to move funds from retirement plans with similar tax benefits like 401(k) plans into your traditional IRA. Provided you follow IRS rules, there are no tax consequences for these rollovers. However, you don’t get a tax deduction for adding money to a traditional IRA with a rollover.