Take Advantage of Tax Deductions in Traditional IRAs
Some retirement accounts allow for income tax deductions that can reduce the amount of taxes you owe or increase your income tax refund if you are owed one. If you have a traditional IRA, you can deduct contributions made on or before the tax return due date. For your 2020 tax returns, if you make a qualified contribution to a retirement account before April 15th, 2021, you can still take the deduction on your 2020 return.
IRAs can be set up with banks, financial institutions, financial advisers or insurance companies. Traditional IRAs are generally not taxed until you withdraw the money.
Making IRA contributions
In order to contribute to a traditional or Roth IRA, you must have earned income during the year through wages, alimony or self-employment. If contributing to a traditional IRA, you must meet the age requirement of being less than 70 and a half years old, although there is no age limit to Roth IRA contributions.
IRA contributions are allowed for one account or both types, but the total amount of your retirement contributions cannot exceed the amount of income you earn that year, or the following limits based on your age and the tax year you want to take the tax deduction for:
Tax year 2020:
- $6,000 for people who are under the age of 50
- $7,000 for people who are age 50 and above.
Tax year 2021 (contribution limits were increased):
- $6,000 for people who are under the age of 50
- $7,000 for people who are age 50 and above.
Not contributing to an IRA, when you're eligible to do so, is a big mistake.
Claiming an IRA tax deduction
Your traditional IRA contributions are reported on Form 1040 or Form 1040A. You can claim an IRA tax deduction whether you take the standard deduction or you itemize. You can calculate the amount of the contribution which is tax deductible using worksheets found in Publication 590, or the instructions for Form 1040 or Form104A. Tax filers using Form 1040EZ cannot claim a tax credit for retirement account contributions.
Subject to income levels
Some people may be eligible to deduct the entire amount of their IRA contribution while others can only deduct a portion of their contribution. This is also true of employer-sponsored 401(k) or 403(b) retirement plans.
Traditional IRAs, 401(k) and 403(b) retirement plans all allow for tax-deductible contributions if you meet the eligibility criteria. A Roth IRA does not provide tax-deductible contributions, but it does allow tax-free distributions, which is an advantage over Traditional IRAs.
You may deduct the full amount of your IRA contribution if your income is below the following limit based on your tax filing status if you are covered by a work sponsored retirement plan:
Single or Head of Household:
- Tax Year 2020: $65,000 - $75,000
- Tax Year 2021: $66,000 - $76,000
Married filing jointly:
- Tax Year 2020: $104,000 - $124,000
- Tax Year 2021: $105,000 - $125,000
Married filing separately:
- Tax Year 2020: $0 - $10,000
- Tax Year 2021: $0 - $10,000
If your income falls within the stated income ranges for either 2020 or 2021 tax years, you might have a partial tax deduction for your IRA contributions. If your income is above the top stated limit, you cannot deduct your IRA contribution on your taxes.
If you are not covered by a work-sponsored retirement account, such as a 401(k) or 403(b), the amount of your traditional IRA contribution is 100% tax deductible if your income falls below the top limit.
