Example - How to Calculate and Report Deductible/Nondeductible Traditional IRA on Your Tax Return

Jack and Jan are married couple and are both 30 years old. They are going to file joint return for 2016. Jack earned $120,000 salary for 2016 and is covered by his employer’s retirement plan. Jan did not work and had no compensation for the year. They also earned $1,000 interest and dividend income from their investment account in 2016. They want to know if they can contribute any amount to a traditional IRA account and how much contribution they can deduct on their return.

Step 1: Figure out if they can make contributions to a traditional IRA account.

Use Table 1. 2016 Traditional IRA Eligibility and Contribution Limit to figure out if they can make contributions to a traditional IRA account and their contribution limits. Since both of them are under age 70 and ½ and Jack has compensation in 2016, Jack can contribute $5,500 to a traditional IRA account in 2016. Jan also can contribute $5,500 to a traditional IRA account in 2016. 

 

Step 2: Calculate the amount of IRA deduction they can claim on their return. 

There are two ways to figure out deductible IRA amount: Using 2016 tax return software to calculate the amount or using worksheets provided by IRS to calculate the amount. If Jack and Jan use tax return software to prepare their return, the software should be able to calculate the deductible amount for them after they input the required information. Jack and Jan can also figure out their deduction as following:

1. Calculate Jack and Jan’s modified AGI (Adjusted Gross Income).

Their modified AGI should be $121,000 ($120,000 salary plus $1,000 interest and dividend).

2. Jack should use Table 2. 2016 Traditional IRA Deduction Limit If You Are Covered By a Retirement Plan at Work to figure out his deductible amount. Since their modified AGI is over $118,000, he can’t deduct any IRA contribution.
 

3. Jan should use Table 3. 2016 Traditional IRA Deduction Limit If You Are NOT Covered By a Retirement Plan at Work to figure out her deductible amount. Since their modified AGI is under $184,000, she can deduct $5,500 IRA contribution.

4. Based on 2 & 3, Jack and Jan’s total deductible IRA is $5,500.

Step 3: Decide how much they want to contribute to their traditional IRA.

Based on Step 1 and 2, Jack can contribute up to $5,500 nondeductible traditional IRA and Jan can contribute up to $5,500 deductible IRA.

Step 4: Contribute the amount to their traditional IRA accounts.

Jack and Jan should have his and her separate traditional IRA account. If they have existing traditional IRA accounts, they can deposit the amount determined on step 3 to their accounts before tax return due date which is typically April 15 (no extension is allowed). If they don’t have traditional IRA accounts, they can open one at any bank or other financial institution or a mutual fund company, such as Fidelity or Vanguard, and contribute the amount before tax return due date.

Note: If they make the contribution between January 1 and April 15, they will need to indicate which tax year the contribution is for when they deposit the money to the financial institution.

Step 5. Report the IRA contribution on their tax return.
 

Assume that Jack is going to make $2,000 nondeductible contribution to his traditional IRA account and Jan is going to make $5,500 deductible contribution to her traditional IRA account. They should report:

1. $5,500 IRA deduction on line 32 of Form 1040.
2. $2,000 nondeductible amount on Form 8606.

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