Factors Determining Calculations

• The IRS allows anyone to make the full $5,000 contribution ($6,000 for people age 50 and older) into a traditional IRA as of 2011. However, not everyone can deduct all the contributions from his taxable income for the year. There are phaseout income ranges set by the IRS to determine who can deduct and who can't. If your income falls below the income range base, you can make a fully deductible contribution. Those within the range can take partial deductions. Anyone earning more than upper limit of the range is not allowed to deduct any of the contribution. Your income, tax filing status and whether you are covered by an employer's retirement plan affect what phaseout range applies to you.
  
  

Not Covered by Employer Plan

• The traditional IRA was initially established by the Employee Retirement Income Security Act (ERISA) of 1974. The purpose was to provide an avenue of tax-qualified retirement savings for those not covered by an employer's plan. While the IRA has been modified over the years, deduction phaseout limits still favor those not covered by an employer's plan. A single or head of household tax filer is not restricted by income -- that is, regardless of his income, he make a fully deductible contribution. A married couple filing joint returns has a phaseout range of $169,000 to $179,000 in 2011. That means the couple can make a fully deductible contribution if it earns less than $169,000, and it can make a partially deductible contribution if it earns between $169,000 and $179,00. None of its contribution is deductible if it earns more than $179,000 a year. If a couple is filing separately but living together with one spouse covered by a plan, the range drops from zero to $10,000.
  
  

Covered by Employer Plan

• Phaseout ranges drop considerably when the tax filer is covered by an employer's retirement plan. The various qualified retirement plans include pensions, deferred profit sharing and 401k, 403b or 457 plans. If you are a single filer or head of household with any of these plans, your deductible phaseout range is $56,000 to $66,000. A married couple filing jointly has a range of $90,000 to $110,000. Once again, married couples filing separately but living together have a range of zero to $10,000.
  
  

Example

• Jack and Janet are married, and both are age 35. Janet is a homemaker taking care of their two small children, while Jack earns $105,000 in modified adjusted gross income (MAGI) each year and has an employer's 401k plan. Jack is allowed to contribute $5,000 a year to his traditional IRA, and Janet can make a $5,000 contribution into her own spousal IRA. However, their joint income puts them in the middle of the phaseout range. The deduction for both is based on the same calculation. Because their MAGI falls within the 2011 phaseout range of $90,000 and $110,000, they first subtract their income ($105,000) from the upper limit ($110,000), which yields an amount of $5,000. That amount is divided by the phaseout range, which is $20,000 ($110,000 minus $90,000). As a result, Jack and Janet can deduct one-fourth, or 25 percent, of their maximum contribution of $5,000 apiece. Jack and Janet can each take a $1,250 tax deduction for a total deduction of $2,500 against their 2011 household income.