IRA Deduction

Taxpayers making contributions to a traditional IRA in 2013 may be able to take an IRA tax deduction on Line 32 of Form 1040. The initial requirement, though, is that the taxpayer (or taxpayer’s spouse if filing a joint return) must have had some earned incometo do so.

Determining the Deduction Amount: Married couples where at least one spouse contributed to both a traditional IRA and a Roth IRA use Publication 590 to calculate their deduction. Unmarried individuals or married individuals filing separately, on the other hand, should use the IRA Deduction Worksheet (see Page 32) to calculate. However, these latter taxpayers should strongly consider the following factors before completing the Worksheet:

-Taxpayers aged 70.5 years or older at the end of 2013 cannot deduct any contributions made to a traditional IRA for 2013.
-Taxpayers cannot deduct contributions to a Roth IRA (but may be able to take the retirement savings contributions credit).
-Taxpayers cannot deduct elective deferrals to a 401(k) plan, 403(b) plan, section 457 plan, SIMPLE plan, or the federal Thrift Savings Plan (but may be able to take the retirement savings contributions credit).
-Taxpayers cannot include on Line 8 of the Worksheet any income received from a nonqualified deferred compensation plan or nongovernmental section 457 plan if the income was included in box 1 of Form W-2 or in box 7 of Form 1099-MISC.
-Taxpayers cannot include qualified rollover contributions in figuring the deduction (contrarily, any rolled over amount will likely be taxable under Line 15b’s IRS distributions).
-Taxpayers cannot include any trustee fees in figuring the deduction if they were billed separately and paid by the taxpayer on behalf of the IRA (these fees can only be deducted via Schedule A’s itemized deduction section).
-If a taxpayer’s total IRA deduction plus any nondeductible contribution to traditional IRAs (shown on Form 8606) is less than his/her total traditional IRA contributions for 2012, see Publication 590 for special rules.

Any taxpayer who, after reading the above list, still believes he/she may be entitled to the IRA deduction should complete the Worksheet.

NOTE: Taxpayers covered by a retirement plan2 at work (Form W-2’s “Retirement Plan” in Box 13 will likely be checked) or through self-employment may be subjected to a reduced, or even eliminated, IRA deduction. Nonetheless, contributions to such plans can still be made and income earned within the IRA will not be taxed until distributed.

1For purposes of this deduction, earned income includes: (i) alimony or separate maintenance payments reportable on Line 11, (ii) any nontaxable combat pay earned as an Armed Forces member, and (iii) self-employed income produced from personal services. For more details, see Publication 590.
2qualified pension, profit-sharing (including 401(k)), annuity, SEP, and/or SIMPLE

Photo by: Simon Cunningham