HOW AND WHEN CONTRIBUTIONS CAN BE DEDUCTED FROM TAXABLE INCOME

Two factors determine whether your IRA contributions can be deducted from your taxable income:

1) Adjusted gross income. Contributions to an IRA made in 1987 and after are not fully deductible if the individual participates in an employer-sponsored retirement plan. Individuals who are covered by such a plan must use their adjusted gross income (AGI) on their tax forms to determine how much may be deducted. On the next screen, we will show you how this works. 2) Whether another employer-sponsored retirement plan covers the IRA holder. Contributions are fully deductible if you are single and not covered by another employer plan. If you are married and neither you nor your spouse is covered by another employer plan, contributions are also fully deductible.

However, there are some additional limits. Though the rules seem complicated, they essentially say that as you make more than a certain amount of money each year, you will be allowed to deduct less and less of your contributions. This and the formula for reducing deductions are discussed in the next two sections.