IRA Deduction Limitations [Tax Q&A]

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By Roy Lewis

The rules limiting deductible contributions to traditional Individual Retirement Accounts (IRAs) were eased by the Taxpayer Relief Act of 1997. The limits apply to taxpayers who are active participants in employer-sponsored retirement plans.

In general, up to $2,000 a year in deductible IRA contributions can be made by a taxpayer, as long as he earns compensation at least equal to the contributed amount. For married couples filing jointly, up to $4,000 can be contributed, as long as their combined compensation at least equals the contributed amount.

For married couples filing jointly, if only one spouse is a participant in an employer's plan, the limitation applies only to that spouse. However, for an individual who is not an active participant, but whose spouse is, the maximum deductible IRA contribution is phased out for taxpayers with AGI between $150,000 and $160,000.

Second, the amounts triggering the limitations are increased for both single taxpayers and married couples filing jointly.

For single taxpayers: The limitation range is increased to $32,000-$42,000 for 2000 (i.e., the maximum IRA deduction is reduced if AGI exceeds $32,000 and is zero if it is $42,000 or more). For 2001, the range increases to $33,000-$43,000; for 2002 to $34,000-$44,000; for 2003 to $40,000-$50,000; for 2004 to $45,000-$55,000, and for 2005 and later years to $50,000-$60,000.

For married couples filing jointly: The maximum IRA deduction for tax year 2000 starts being reduced at an AGI of $52,000 but only reaches zero for AGI of $62,000 or more. For 2001, the phaseout range for married couples filing jointly increases to $53,000-$63,000; for 2002 to $54,000-$64,000; for 2003 to $60,000-$70,000; for 2004 to $65,000-$75,000; for 2005 to $70,000 - $80,000; for 2006 to $75,000-$85,000 and for 2007 and later years to $80,000-$100,000.

But note: For married couples filing separately, the phase-out range remains at zero to $10,000 as under pre-'97 Act law.

Example: Jack and Jill file jointly in 2000, with joint AGI of $75,000 comprised largely of compensation income. Jack is an active participant in his employer's plan but Jill is not. Any IRA contribution Jack makes is not deductible, but Jill can deduct up to $2,000 in IRA contributions. Why? Because Jack is a participant in his employer's plan, and his joint AGI is greater than $62,000. But Jill, who is NOT a participant in her employer's plan, is available to make a deductible $2,000 IRA contribution because her joint AGI is less than $150,000. Jill's deductible IRA contribution is no longer "tainted" just because Jack is a participant in his employer's pension plan.

Note: In this example, if the joint AGI were $57,000 instead of $75,000, Jack would be able to deduct up to $1,000 in IRA contributions. Since their AGI is only halfway between the $52,000-$62,000 range for tax year 2000, the deduction limitation would only be reduced 50%: from $2,000 to $1,000. Jill would still be able to deduct her entire $2,000 contribution, since the joint AGI would be under the $150,000 limitation.

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