With deadlines for filing your 2015 taxes fast approaching, it is definitely time to consider your deductions if you haven’t already.
Put simply, tax deductions reduce your income tax liability (whether filing as an individual or married). A deduction though, is not the same as a tax credit, which actually reduces your taxes by the amount of the credit. Tax deductions, on the other hand, reduce your taxable income; so a deduction’s ultimate value depends on your tax rate and your tax rate is based on your income. Unlike contributions to IRAs and 401k’s, which remained the same for 2015 -2016, there were some changes, though relatively small, to the deduction limits in some instances.
To see your deduction limit find your filing status among the subheads below and then select the situation that most closely matches your own situation.
Single Deduction Limits 2015/2016
- If you are Single AND covered by a workplace retirement plan AND your adjusted gross income (AGI*) is between $61,000 and $71,000 then you cannot deduct your IRA contributions.
- Similarly, if you are a Head of Household* AND covered by a workplace retirement plan AND your AGI is between $61,000 and $71,000 then you cannot deduct your IRA contributions.
- If you are Single and NOT covered by a workplace retirement plan you can deduct up to your contribution limit. So, for a single person under the age of 50 that contributed the maximum of $5,500 you may deduct that same amount (or whatever you contributed below the limit). For those over 50 that made the additional $1,000 catch-up limit for a total contribution of $6,500, you can deduct up to that amount. Again, you can only deduct as much as you contributed, so if you contributed $0 to an IRA that is how much you can deduct from your tax bill.
Married Deduction Limits 2015/2016
- Married filing jointly and you ARE covered by a workplace retirement plan and where the spouse is also making an IRA contribution — the income phase-out range is $98,000 to $118,000 for 2015 and remains unchanged for 2016. If your combined income is $98,000 or less you can take a deduction up to your contribution limit. If your combined income is more than $98,000 and less than $118,000 you can take a partial deduction. If it is more than $118,000 you can take no deduction.
- Married filing jointly or separately and you ARE NOT covered by a workplace retirement and neither is your spouse. In this case it does not matter what your modified AGI is, you can take a full deduction up to the amount of your contribution limit.
- 2015 – Married filing jointly and you ARE NOT covered by a workplace retirement plan but your spouse is covered by a plan at work and your modified AGI is $183,000 or less you can take a full deduction up to the amount of your contribution limit. If your modified AGI is more than $183,000 but less than $193,000 you can take a partial deduction. For those making more than $193,000 there is no deduction.
- 2016, modified AGI limits increase by $1,000 for those married filing jointly and you ARE NOT covered by a workplace retirement plan but your spouse is covered by a plan at work and your modified AGI is $184,000 or less you can take a full deduction up to the amount of your contribution limit. If your modified AGI is more than $184,000 but less than $194,000 you can take a partial deduction. For those making more than $194,000 there is no deduction.
- Married filing separately and you ARE covered by a workplace retirement plan, the phase-out range remains $0 to $10,000. If your modified AGI is less than $10,000 you can take a partial deduction. If it is more than $10,000 you cannot take a deduction.
- Married filing separately and you ARE NOT covered by a workplace retirement plan but have a spouse who is covered by a plan at work and your modified AGI is less than $10,000 you can take a partial deduction. If your modified AGI is $10,000 or more then you cannot take a deduction.
Unsure whether you or a spouse is covered by a plan or what that means? See the IRS Are You Covered by an Employer’s Retirement Plan page for more detail.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status.
*Terminology used in this post:
Adjusted Gross Income (AGI) is an individual’s income minus adjustments to income due to specific deductions.
Modified AGI A taxpayer’s modified adjusted gross income (MAGI) is a series of calculations used to determine how much of an individual’s IRA contribution is deductible. It begins with a taxpayer’s AGI and considers other deductions. For specifically how to calculate MAGI see Worksheet 1-1 in this IRS IRA document.
Head of Household is an often-misunderstood filing status. In a nutshell it refers to someone that is unmarried or considered unmarried on the last day of the year and who has a qualified dependent or paid for more than half of the cost of maintaining a home during the year. For more detail on head of household and who can be classified as a qualified person or dependent see IRS Publication 501.
Phase-out Range in simplest terms refers to what should be a fair sliding-scale approach in which there is a gradual reduction of a tax deduction or tax credit based on a taxpayer’s or tax-paying couple’s income level. In other words as the taxpayer’s or couple’s income goes up there is a fair and commensurate reduction in the amount of the deduction or credit. Unfortunately, you won’t find clear guidance on this subject from the IRS because the agency and Congress have not agreed on a methodology for how to fairly calculate the intersection of the income range and the reduction. For more explanation see this documentation from the U.S. House of Representatives
Partial Deduction When your income falls within the ranges described you need to calculate the reduced amount of your deduction by using Worksheet 1-2. “Figuring Your Reduced IRA Deduction for 2015” of IRS Publication 590-A.
Nothing in this article should be construed as investment advice, or a solicitation or offer, or recommendation, to buy or sell any security. Investing in mutual funds, exchange traded funds, and other securities carries risk of all or part of the amount invested. Past performance is no guarantee of future results. FeeX assumes no responsibility for the tax consequences to any investor of any transaction, investors should confer with their personal advisor or tax professional regarding their particular circumstances.