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IRA Tax Deduction – Do You Qualify?

Clients often ask if they qualify for an IRA tax deduction.

Individual Retirement Arrangements, more widely known as Individual Retirement Accounts (IRAs), are one of the most popular retirement savings tools in America in addition to 401ks.

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It’s no surprise since IRAs often enjoy preferential tax treatment in the eyes of Uncle Sam.
Personal Capital offers holistic, tax-efficient financial planning to wealth management clients. Schedule a time to talk to an advisor to get ahead of your tax bill.

Traditional IRA Contribution Criteria & Limits

The criteria for contributing to an IRA is simple: If you or your spouse earns taxable income in a given year, you can contribute that amount of taxable compensation to an IRA up to the applicable limit. That’s it!

For 2019 and 2020 tax returns, the annual IRA contribution limit increased from $5,500 to $6,000 per year, plus $1,000 in catch-up contributions if you are age 50 or older.

Can I Take An IRA Tax Deduction?

Whether you can reduce your taxes today by deducting your IRA contributions is a bit more complicated. This depends on several different factors, starting with your access to a retirement plan where you work.

If you’re single (or married) and you (and your spouse) are not covered by a retirement plan (such as a 401k plan), you can deduct the entire amount of your annual IRA contribution on your federal income tax return, which may reduce the amount of taxes you pay today.

Even if your spouse doesn’t work outside the home and you file a joint tax return, he or she can still contribute to a separate IRA and deduct the contribution, up to the contribution limits. This is referred to as a “Spousal IRA Contribution.”

However, if you are considered “covered” by a retirement plan, your ability to deduct your IRA contributions will depend on your tax filing status and modified adjusted gross income.

For 2019 taxes, IRA tax deductions start to phase out once your modified adjusted gross income (MAGI) reaches $64,000 if you’re single or $103,000 if you’re married and file a joint tax return for the year. The deduction phases out completely once your MAGI reaches $74,000 if you’re single or $123,000 if you’re married filing jointly. (For 2018, the figures were $63,000/$73,000 filing single, and $101,000/$121,000 each married filing jointly).

For 2020 tax returns, IRA tax deductions start to phase out once MAGI levels reach $65,000 for singles and $104,000 for married and filed jointly returns. Deductions phase out entirely once MAGI reaches $75,000 for single filers, and $124,000 if you are married filing jointly.

What if both spouses work and only one is covered by a plan at work? If you don’t have a workplace plan and are contributing to an IRA but your spouse IS covered by a workplace retirement plan, then the numbers for taking an IRA tax deduction are slightly different for 2019 returns:

  • Phaseout starts at $193,000 if married, filing jointly
  • Married couples filing jointly become ineligible for the deduction when income reaches $203,000
  • The 2018 figures were $189,000 and $199,000

The below will apply for 2020 tax returns if you do not have a workplace plan and are contributing to an IRA but your spouse IS covered by a workplace retirement plan:

  • Phaseout starts at $196,000 if married, filing jointly
  • Married couples filing jointly become ineligible for the deduction when incomes reaches $206,000

You Can Still Make IRA Contributions for the 2019 Tax Year

The deadline for making contributions to IRA’s for tax year 2019 was extended to July 15, 2020 as part of the IRS’ tax deadline extension due to the global pandemic. This means you still have time to potentially lower your 2019 tax bill by making a tax-deductible IRA contribution if you qualify. You can even open a new IRA between now and July 15 and make contributions for tax year 2019 if you don’t currently have one established.

You don’t have to wait until tax season either. You can allocate any contributions you make between now and the deadline of April 15th of next year for tax year 2020. This will enable you to get a jump start on retirement saving this year and potentially maximize tax savings on your 2020 return.

Read More: Last-Minute Tax Tip: The IRA Contribution Deadline

Tip: Automate Your IRA Contributions

One way to ensure that you max out IRA contributions every year is to arrange for money to be transferred from a checking account into your IRA electronically each month. This way, you don’t have to exert mental energy each month – your contributions are made automatically. Sometimes this is referred to as “paying yourself first,” which is what you’re doing when you contribute to an employer sponsored retirement plan like a 401(k).

Are you on track for the retirement you want? Use Personal Capital’s free Retirement Planner tool and see where you stand.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Andrew Smith, CFP®
Andrew Smith, CFP® is a financial advisor at Personal Capital.
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