Falling Within the Phaseout, Part 2 - Determining Your Reduced IRA Deduction for 2020
By Andy Ives, CFP®, AIF®
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In my blog entry from March 22, I discussed the formula for calculating the amount of a direct Roth IRA contribution when your income falls within the Roth phaseout limits. Another common phaseout covers how much of a Traditional IRA contribution can be deducted. As with the Roth contribution phaseout, this income level cutoff is not a “cliff,” meaning if you go one dollar over the level, you do not immediately become ineligible to deduct your Traditional IRA contribution. There is a phaseout range which gradually decreases the amount of the allowed deduction.
It is important to note that the phaseout for Traditional IRA deductibility only applies when a person or their spouse is covered by an employer plan. (A good indicator or whether you are “covered” can be found on your W-2 – see if there is a check in the “retirement plan” box.) If neither you nor your spouse is covered, then you can deduct your IRA contribution, even if your income is over the phaseout range. For 2020, the phaseouts for IRA deductibility were $104,000 to $124,000 for married/filing joint, and $65,000 to $75,000 for single filers. (In 2021, these numbers were increased to $105,000 - $125,000 and $66,000 - $76,000, respectively.)
What if, after all the annual numbers are tallied, your income falls within one of these phaseout ranges? How do you calculate how much can be deducted as a Traditional IRA contribution? The 2020 version of IRS Publication 590-A provides a table to help calculate that number:
filing status is...
THEN enter on
line 1 below...
are covered by an
single or head of
married filing jointly or qualifying widow(er)
married filing separately
Are not covered by an employer plan, but your spouse is covered
married filing jointly
married filing separately
Line 1. Enter applicable amount from the table above.
Line 2. Enter your modified AGI (total for both spouses, if married/filing joint.) If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible.
Line 3. Subtract line 2 from line 1. If line 3 is $10,000 or more [$20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan], stop here. You can take a full IRA deduction for contributions of up to $6,000 ($7,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less.
Line 4. Multiply line 3 by the percentage below that applies to you. If the result isn’t a multiple of $10, round it to the next highest multiple of $10. If the result is less than $200, enter $200.
· Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 30% (0.30) [by 35% (0.35) if you are age 50 or older].
· All others, multiply line 3 by 60% (0.60) [by 70% (0.70) if you are age 50 or older].
Line 5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 14 (deductible part of self-employment tax) and Schedule 1 (Form 1040), line 15 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040, 1040-SR, or 1040-NR, do not reduce your compensation by any losses from self-employment.
Line 6. Enter contributions made, or to be made, to your IRA for 2020, but do not enter more than $6,000 ($7,000 if you are age 50 or older).
Line 7. Your IRA Deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on your Schedule 1 (Form 1040), line 19. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8.
Line 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606.
As with all tax issues and questions, please seek a qualified tax professional for further guidance.
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