Deductibility of Traditional IRA Contributions on Federal Tax Return

Last update on: Jun 28 2021

By Bruce Miller

Now that I have provided information regarding IRA contributions basics and answered few real-life examples of questions frequently asked by clients, I will focus in this article on whether and how much of the contributions can be deducted from the investor’s federal tax liability.

Here are few points that investors should know regarding the deductibility of Traditional IRA (TIRA) contributions on federal tax returns.

Some TIRA contributions can be deductible. However, Roth IRA (RIRA) contributions are NEVER deductible.

For TIRAs, an “active participant” – an individual or employer contributing anything into an individual retirement plan for that particular year – might be eligible to deduct those contributions depending on the individuals or couples Adjusted Gross Income (AGI). Please note that the IRS Publication 590 uses the term “covered” to designate whether an employee is an active participant or not. This term is misleading, as being “covered” or eligible to participate in an employer sponsored retirement plan does not make an employee an active participant, except for defined benefit – or pension – plans. For the employee to be an active participant, assets – cash or company stock – must actually be placed into the employee’s retirement plan account. If there are no additions to the employer-sponsored plan, then the employee is not an active participant and he or she may fully deduct their TIRA contributions regardless of the size of the AGI. However, if even $1 is added to their employer-sponsored retirement plan for the year, then the ability to deduct a TIRA contribution will depend on the household’s AGI. The following amounts are for 2017

a. For singles/Head of Household, if AGI is less than $62,000 or Married filing Jointly (MFJ) AGI is less than $99,000, the TIRA contribution is fully deductible on line 32 of form 1040.

b. If AGI is greater than $72,000 for Single/Head of Household or greater than $119,000 for MFJ, none of the contribution is deductible

c. If AGI is between these two limits, the deductible percentage of the annual contribution will be proportional to how far into this “phase-out range” the contributor’s AGI is. For example, if the AGI is half way through the phase out range for a single filer (AGI = $67,000), then half of the contribution would be deductible, while the other half would not.

Some states, such as Massachusetts, Pennsylvania and New Jersey, do not allow TIRA contributions to be deductible for state income tax purposes, so their “state basis” must be tracked separately.

A “Spousal IRA” allows the non-working spouse of a working spouse who is an active participant with their employer’s retirement plan, to make a deductible TIRA contribution up to an AGI of $196,000, with a phase-out beginning at an AGI of $186,000 for 2017.
The IRA owner does not have to itemize deductions to deduct his or her TIRA contribution. A TIRA deduction is taken on the front of form 1040, not the itemized deductions of Schedule A.

Deducting one’s TIRA eligible contributions is optional. For example, a couple that does not have enough income to pay income tax, but has earned income and wishes to make a TIRA contribution, would be better not to deduct their TIRA contributions.

These are just few basic points about TIRA contribution deductibility. In my next article I will address some questions that will illustrate how these rules apply in real-life situations.