How IRA Tax Deductions Work

IRA Tax Deduction Eligibility for Those Without Employer Plans

The money that you put away into a traditional or rollover IRA may be eligible for a deduction come tax time. Unlike a tax credit, which reduces a person's tax liability on a dollar-for-dollar basis, a deduction reduces the person's income for tax purposes. That means the money won't be counted as income in determining your tax bracket and calculating your tax obligation [source: IRS]. A person's eligibility for an IRA tax deduction depends on his or her income, tax filing status and whether the taxpayer's employer sponsors a retirement savings plan.

First, there are limits on the amount of money that an investor can contribute to a traditional IRA for tax purposes. In 2014 and 2015, the maximum contribution is $5,500 a year – per person – and $6,500 for folks who are ages 50 and over. Any money allotted to an IRA that exceeds these limits is taxed at a rate of 6 percent. The limits don't apply to rollover contributions [source: IRS].

Next, there's the question of whether your employer offers a retirement plan. A single person filing as a head of household or qualifying widow or widower who doesn't have the option to participate in a 401(k) or 403(b) through his or her job can claim a deduction for the full amount contributed to an IRA each year, subject to the limits described above. The same goes for a married person who files a joint or separate tax return and whose spouse also isn't offered the chance to participate in a retirement plan through his or her employer [source: IRS].

Things get a little more complicated for married folks when one spouse is covered under an employer-sponsored retirement plan. Their eligibility depends on their income: A married couple filing jointly when one person is covered by another plan can get the full amount of the IRA deduction if their adjusted gross income is $181,000 or less. Those who make between $181,000 and $191,000 can get a partial deduction, while those who earn more than $191,000 over the year aren't entitled to any deduction. If the spouse who isn't covered by the plan files a tax return separately, the income limit drops to $10,000 and only a partial deduction is available [source: IRS].