One of the most attractive features of the traditional IRA is that contributions can be deducted from income when you file your tax return. On the other hand, Roth IRA contributions are not tax-deductible. How much you can add to an IRA to decrease your adjusted gross income -- or AGI -- depends on your income, your tax-filing status and whether you or your spouse are covered by an employer-sponsored retirement plan.
The Internal Revenue Service mandates that you contribute only earned income to any IRA. The agency defines earned income to include salaries, wages, tips, commissions and self-employment income. Alimony and taxable military pay also fall within the guidelines. However, investment, rent and royalty income do not qualify. Neither do Social Security benefits, disability benefits, pension or annuity income. You can add no more to an IRA than you earn in a given year. For example, if you earn just $2,500, you can contribute no more than $2,500 that year.
Yearly Maximum Contribution
The maximum per-year IRA contribution is $5,000 as of 2012. Taxpayers age 50 or greater can contribute a "catch-up contribution" of $1,000, making their limit $6,000 per year. If you add more than the maximum in a given year, you will have to pay a 6 percent penalty tax on the amount of the overpayment, or excess contribution. You cannot include the overpayment as a tax deduction. You can decrease your adjusted gross income by the yearly maximum and no more.
A rollover to a traditional IRA from another IRA or from a qualified retirement plan is not tax-deductible. Therefore, such a transaction will not reduce your AGI.
IRA Contribution Deductibility
If you participate in a retirement plan at your job, the IRS limits IRA contribution deductibility according to income, tax-filing status and whether you or your spouse contribute to an employer-sponsored retirement plan. For example, as of 2012, if your spouse is covered by a plan at work but you are not, and you file jointly, you can deduct the full IRA contribution with an AGI of $173,000 or less. You can take a partial deduction if your AGI lies between $173,000 and $183,000. An AGI of $183,000 or more disqualifies you from the deduction. The deduction phases out at a far lower figure for single filers and for married taxpayers filing separately than for married taxpayers filing jointly. If you and your spouse file jointly and neither of you participates in a work-sponsored plan, you can both take the full deduction.
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