Can an IRA Be Used to Reduce AGI?
You may be able to lower your adjusted gross income (AGI) for the year by putting money in a traditional individual retirement account (IRA). However, depending on your circumstances, you may not be able to deduct your traditional IRA contribution. No matter what your circumstances, you can never use a Roth IRA contribution to reduce your AGI.
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Employer Plans Defined
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Part of your eligibility to reduce your AGI depends on whether you are covered by an employer retirement plan. If your spouse is covered by an employer plan, you may also be affected. Employer plans include 401(k) plans, 403(b) plans, 457 plans, SIMPLE IRAs and SEP IRAs. You can also check your Form W-2 to find out if you are covered. If you are covered, the box under "Retirement Plan" in box 13 will be checked.
Modified AGI Limits for Deduction
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If either you or your spouse have an employer plan, you may not be able to use your traditional IRA contribution to reduce your AGI based on your modified adjusted gross income (MAGI). If your modified AGI falls in the phaseout range, your deduction is restricted. If your modified AGI exceeds the limits, you cannot use your traditional IRA contribution to lower your AGI. The limits are published in Publication 590 and vary depending on who has the plan and what you use for your filing status.
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No Employer Plan
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If neither you nor your spouse has an employer plan, you can use your IRA contribution reduce your AGI no matter how much you earn. The only limitation on the amount of your deduction is the amount of the annual contribution limit for IRAs. As of 2011, you can contribute up to $5,000 per year. If you are 50 or older, the limit increases to $6,000.
Reducing Your AGI
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The IRS classifies the deduction for traditional IRA contributions as an adjustment to income, which means it reduces your adjusted gross income. If you are entitled to a deduction for your traditional IRA contribution, you can report it using Form 1040 or Form 1040A. Form 1040EZ does not have a line item for claiming the traditional IRA deduction. When you report the deduction, it is added to your other adjustments to income and then the total is subtracted from your total income.
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