Can I Deduct IRA contributions on my taxes?
CAN I DEDUCT IRA CONTRIBUTIONS ON MY TAXES?
That is a great question. Each person’s situation will have unique facts and circumstances, so well…it depends.
Let’s discuss some general scenarios and you can see if any of these apply to you. You may also want to reference IRS Pub 590-A and FAQs Regarding IRAs to see what the IRS says about this issue.
Foremost, it's crucial to recognize that the deductibility of an IRA contribution hinges on your filing status and Modified Adjusted Gross Income (MAGI), subject to varying limits. As a taxpayer, consider the following:
Do you participate in an employer retirement plan such as a 401k or 403b? If so, your IRA contribution deduction on your 2022 tax return might be restricted by your MAGI as follows:
If you're Single or Head of Household, deductibility begins to phase out at $68,000 and is fully phased out at $78,000.
If you file Married Filing Jointly (MFJ) or as a Widower, and both you and your spouse are covered by an employer retirement plan, deductibility begins to phase out at $109,000 and is fully phased out at $129,000.
If you file MFJ or as a Widower, and only one spouse is covered by an employer retirement plan, deductibility begins to phase out at $204,000 and is fully phased out at $214,000.
If you file Married Filing Separately, your IRA deductibility is partial for income up to $9,999, and there's no deduction if your MAGI is $10,000 or more.
There are annual limits on IRA/Roth IRA contributions. For 2022, the maximum contribution is $6,000 per person, increasing to $6,500 in 2023. Taxpayers aged 50 and above can make catch-up contributions, with a limit of $1,000 per taxpayer per year for IRA/Roth IRA.
Now, let's explore some examples to illustrate these concepts.
Example 1: Jack and Jill
Jack and Jill, both under 50, file Married Filing Jointly and participate in their employer's retirement plans. In 2022, their MAGI was $100,000.
Jack maxed out his employer's retirement plan contribution at $20,500. Can he contribute to an IRA and deduct it?
Yes and no. Although Jack reached the elective deferral contribution limit, he can still contribute to an IRA. However, he can't deduct these contributions on his tax return. Jack needs to file Form 8606 to report non-deductible contributions, tracking his cost basis in the IRA, which won't be taxed upon retirement.
Jill contributes $2,500 to her employer's retirement plan. Can she contribute to an IRA and deduct it?
Yes, Jill can contribute up to $6,000 to her IRA and deduct it since she hasn't reached the elective deferral contribution limit, and their MAGI is within the limit.
For taxpayers under 50, the total contribution limit for 2022, including both employer and IRA contributions, is $20,500 max. Contributions are pre-tax or deductible subject to MAGI limitations.
If Jack maxes out his employer plan, he can't deduct IRA contributions beyond that limit. Catch-up contributions for taxpayers over 50 don't count towards the elective deferral contribution limit.
Example 2: Peter
Peter is single, under age 50, and makes $65,000 MAGI.
Peter, single and under 50, has a MAGI of $65,000. He contributed $15,000 to his employer's retirement plan. How much can he contribute to his IRA, and is it deductible?
Peter can contribute up to $6,000 to his IRA, with only $5,500 being deductible due to the $20,500 elective deferral contribution limit. Since his MAGI is under the limit, he can deduct $5,500 on his tax return, reporting the remaining $500 as a non-deductible contribution on Form 8606.
If Peter were over 50 and contributed the maximum $7,000 to his IRA, he'd still only be eligible to deduct $5,500, given his previous contributions to the employer retirement plan.
Example 3: Janet and Bob
Janet and Bob file MFJ and are not covered by employer retirement plans.
Can Janet and Bob contribute to an IRA? If so, how much, and is it deductible?
Janet and Bob, filing MFJ, aren't covered by employer retirement plans. Can they contribute to an IRA, and is it deductible?
Yes, Janet and Bob can each contribute and deduct their IRA contributions up to their taxable compensation. Janet can contribute and deduct up to $6,000, while Bob, over 50, can contribute $6,000 plus a $1,000 catch-up, deducting up to $7,000.
With no employer retirement plan coverage, MAGI phase-out limits don't apply. They can deduct their entire contributions regardless of MAGI for 2022.
Some final points on contributing to a Roth IRA:
Roth IRA contributions aren't deductible.
MAGI limits apply to Roth IRAs.
The elective deferral contribution limit for 2023 is $22,500.
IRA/Roth IRA contribution limits for 2023 are $6,500 for taxpayers under 50 and $7,500 for those over 50.
Verify contribution and MAGI limits annually on the IRS website.
Make sure you check out FAQs Regarding IRAs on the IRS website each year to verify the contribution and MAGI limits.
If you are still unsure about your situation, and want expert advice, you can click this link to set an appointment to speak with a Tax Expert from Lisa Brugman, EA & Associates.
