Learn something new every day

[jIM_Ohio]

I was discussing my tax situation on a few forums like this one, and I learned something which I thought I knew, but was wrong about.

Just because you contribute to a 401k (or similar plan) does not prevent a person from contributing to a deductable IRA.

From pub 590
Publication 590 (2007), Individual Retirement Arrangements (IRAs)

Table 1-2. Effect of Modified AGI 1 on Deduction if You Are Covered by a Retirement Plan at Work
If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

IF your filing
status is ... AND your modified adjusted gross income (modified AGI)
is ... THEN you can take ...
single or
head of household $52,000 or less a full deduction.
more than $52,000
but less than $62,000 a partial deduction.
$62,000 or more no deduction.
married filing jointly or
qualifying widow(er) $83,000 or less a full deduction.
more than $83,000
but less than $103,000 a partial deduction.
$103,000 or more no deduction. married filing separately 2 less than $10,000 a partial deduction.
$10,000 or more no deduction.


1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status).


So it helps to check what you know all the time. The above was a change for 2007 (which I did not know about until after I did my taxes). My AGI was well below 83k, and it will be lower in 2008.

This came up as I was doing tax planning for 2008. Two new kids, 6k worth of deductions added. Turns out I am heading into AMT territory, and the deducatable IRAs (instead of Roths) might make more sense for us in 2008 (to avoid AMT by lowering taxable income).

[Broken Arrow]

Wisdom!

[texastek76]

I looked into this more recently when I relaized that we would have to recharacterize my wife's Roth because we exceeded the income limits. Having never had a traditional IRA before I thought those contributions were always deductible. I was disappointed to find out that there are income limits on deducting the traditional contributions (as you stated above as well).

I have been doing some digging and I can't seem to find any other means to reduce my taxable income (alreadsy maxing out 401(k) and putting money info FSAs). Anyone have any ideas?

[jIM_Ohio]

I looked into this more recently when I relaized that we would have to recharacterize my wife's Roth because we exceeded the income limits. Having never had a traditional IRA before I thought those contributions were always deductible. I was disappointed to find out that there are income limits on deducting the traditional contributions (as you stated above as well).

I have been doing some digging and I can't seem to find any other means to reduce my taxable income (alreadsy maxing out 401(k) and putting money info FSAs). Anyone have any ideas?

What is your gross income before taxes?
Does your wife work?

Have you looked into HDHP/HSA's?

[texastek76]

What is your gross income before taxes?
Does your wife work?

Have you looked into HDHP/HSA's?

Gross is 186 and taxable is 171 (from the 15k 401k).

Not sure about the HDHP/HSA. If I already have empliyer paid health insurance how would this help? Does it reduce tax liability?

[sweeps]

Other possibilities:
Health Care Flexible Spending Account (if you have out-of-pocket health expenses)
Dependent Care Flexible Spending Account (if you pay for day care for your kids)
Commuter Benefit program (up to $115/mo pre-tax benefit if your employer participates)
SEP, SIMPLE or similar plan (if you have self-employment income)
Education deduction (take a class)

[jIM_Ohio]

Money goes into an HSA pre-tax, and is not taxed for health care expenses on way out. 5k per year max. You need an HDHP to be eligible.

Wife could contribute to a 401k or deductable IRA.

The dependant care suggestion was a good one. If wife stays at home, maybe an accountant could help her set up an LLC for child care, put money in dependant care account, then pay her (pre tax) thru that. Of course SS would need to be paid (7%) and some other taxes, unless you can write off all the income as a business expense.

At your income, I would suggest asking an accountant/CPA/CFP.

[texastek76]

Money goes into an HSA pre-tax, and is not taxed for health care expenses on way out. 5k per year max. You need an HDHP to be eligible.

Wife could contribute to a 401k or deductable IRA.

The dependant care suggestion was a good one. If wife stays at home, maybe an accountant could help her set up an LLC for child care, put money in dependant care account, then pay her (pre tax) thru that. Of course SS would need to be paid (7%) and some other taxes, unless you can write off all the income as a business expense.

At your income, I would suggest asking an accountant/CPA/CFP.

My wife is a stay-at-home mom so we wouldn't be able to contribute anything for her that is deductible. Interesting point about the dependant care set-up though. I have often wondered about the legality of essentially paying your spouse to watch the kiddos. I will look into it. Sadly our dependant care election was due in January so I would not be able to increase it until 2009.

Thanks for the advice guys...

[jIM_Ohio]

Can a spousal IRA for you be deductable?

[texastek76]

Can a spousal IRA for you be deductable?

According to TaxCut and TurboTax I can't...