Individual Retirement Account (IRA) Deduction

Contributions to traditional IRAs and Roth IRAs are tax deductible, reducing your taxable income and thus your overall income tax liability.

Contributions to a traditional IRA or Roth IRA cannot exceed your earned income or $5,000 for those under age 50 and $6,000 for those 50 and over.

These limits are for combined contributions to traditional and Roth IRAs. Contributions can be split between the two types of retirement plans, but together cannot exceed the limit.

In order to contribute to an IRA, you must have earned income from that tax year. Earned income consists of wages, salaries, tips, commissions, bonuses, or net self-employment income. Also, for IRA purposes, alimony and separate maintenance payments are treated as earned income.

The deduction does fade out for filers above certain income levels.

For single filers, heads of household, and married filers with a spouse who is not covered by a retirement plan at work, the deduction does not phase out.

But for married taxpayers with a spouse who is covered by a retirement plan at work, the deduction phases out between incomes of $173,000 and $183,000.

For married taxpayers filing separately with a spouse who is covered by a plan at work, only a partial deduction is available at income levels below $10,000 and no deduction available for incomes above $10,000.

Note that you can only contribute to a traditional IRA if you are under the age of 70.5 at the end of the tax year. Contributions to a Roth IRA, on the other hand, are not restricted by age.

You can make contributions to an IRA as late as the first tax return deadline (usually April 15, depending on the year) and still have them count toward the previous tax year.