In our first deduction of the week in 2010, we are going to take a closer look at the Traditional IRA Contribution Deduction. This deduction is especially useful in late tax planning, since you can make contributions up until the April 15th tax deadline.
Retroactive Payments
Yes, you read that correctly! You can make payments retroactively, up until the tax deadline. Therefore, you can make a contribution now, that will lower your tax liability from last year.
IRA Deduction
When you make contributions to a traditional IRA – not a Roth IRA – you can deduct your yearly contributions from your taxable income. You will need to include it on Line 32 of IRS Form 1040, or Line 17 on IRS Form 1040A, and then subtract the amount from your total adjusted gross income.
Income Level Phase Outs
If you are a single taxpayer then you can only claim the full deduction if your income is below $55,000 per year, or $89,000 for married couples filing jointly. The deduction phases out slowly as your income increases, and taxpayers earning over $65,000, or $109,000 for married couples, cannot claim the deduction.
Contribution Limits
Unfortunately there is a limit on the amount of contributions you can claim on your tax return. For the tax years 2008 and 2009 the dollar limits for IRA contributions are $5,000 for taxpayers under the age of 50, and $6,000 for those 50 and over.
Rules per the IRS
According to IRS Tax Topic 451, “to contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.”