To claim an IRA as a tax deduction, taxpayers must meet the eligibility requirements, the Internal Revenue Service said.
The eligibility requirements for deducting Individual Retirement Arrangements (IRAs) on tax returns are based on the size of the taxpayer's adjusted gross income (AGI) and whether the taxpayer is an active participant in any type of employer-maintained retirement plan.Taxpayers can claim the maximum deduction for IRA contributions ($2,000 or 100 percent of compensation, whichever is less) only if they meet one of the following criteria: The individual is not an active participant (or in the case of a married couple, neither spouse is an active participant) in an employer-maintained retirement plan during the year, regardless of the amount of the taxpayer's AGI, or the individual (or in the case of a married couple, either spouse) is an active participant in an employer-maintained retirement plan, and the taxpayer's AGI is less then $40,000 for a married couple or $25,000 for a single individual.
If an individual (or, in the case of a married couple, either spouse) is an active participant in an employer-maintained retirement plan, the maximum allowable deduction for contributions to an IRA will begin to "phase out" when AGI reaches $15,000 ($40,000 for a married couple). When AGI reaches #35,000 ($50,000 for a married couple), no deductions are allowed for IRA contributions.
While many taxpayers may have their deductible IRA contributions reduced or eliminated due to the eligibility requirements, they will be able to continue making nondeductible contributions to a new or an existing IRA. As with the earnings on deductible IRA contributions, any earnings realized on nondeductible IRA contributions are not taxed until distributed to the taxpayers, generally at retirement when the individual may have a lower taxable income.
Tax law changes on IRAs, through the Tax Reform Act of 1986, include changes in the rules concerning spousal IRA deduction, qualified voluntary employee contributions, and the purchase of gold and silver coins for an IRA.
The spousal IRA provisions have been changed to eliminate the requirement that the spouse have no compensation in the year in order to be eligible for the spousal IRA contribution.
The law repealed the IRA deduction previously allowed for voluntary employee deductible contributions (DECs) to a qualified plan. Also, beginning in 1987, taxpayers are allowed to establish an IRA by investing in certain gold and silver coins issued by the United States.
Other basic tax rules concerning IRAs were not affected by the law. Taxpayers may continue to establish or contribute funds to an IRA at any time during the tax year and the following year, up to the due date for filing their tax return, without extension, prior to the year they reach 70 1/2.
Taxpayers who withdraw funds from an IRA before age 59 1/2 are required to pay an additional 10 percent tax unless the withdrawal was due to the death or permanent disability of the taxpayer or was due to a return of nondeductible contributions.
Taxpayers may also continue to make tax-free rollovers, either from one IRA to another or from an employer-maintained retirement plan to an IRA.