How to Calculate Your Maximum IRA Deduction

An Individual Retirement Arrangement (IRA) allows you to save for retirement with tax advantages. An IRA deduction is a tax benefit for contributions to a Traditional IRA that reduces your current taxable income. By subtracting your eligible contributions from your gross income, you lower the amount of income subject to federal and state income tax, which can result in a lower tax bill or a larger tax refund.

The ability to take this deduction is not automatic. The deductibility of your contributions depends on your income, tax filing status, and whether you or your spouse are active participants in an employer’s retirement plan.

Annual IRA Contribution Limits

Before calculating your deduction, you must know the maximum you can contribute to an IRA for a tax year. The IRS sets annual limits on contributions to all your IRAs combined, including Traditional and Roth IRAs. For 2024 and 2025, an individual under age 50 can contribute a maximum of $7,000 per year.

Individuals age 50 or over during the tax year are eligible for a “catch-up” contribution. This allows them to contribute an additional $1,000 for a total of $8,000 for 2024 and 2025.

A requirement for any IRA contribution is that you must have earned income. Earned income generally includes wages, salaries, tips, commissions, and self-employment income. It does not include items like investment income, pension or annuity income, or deferred compensation. The total amount you contribute cannot exceed your earned income for the year.

These figures are the maximum contribution limits, not the deduction limits. The actual amount you can deduct is determined by a separate set of rules.

Determining Your Traditional IRA Deduction

The deductibility of your Traditional IRA contributions hinges on whether you are covered by a retirement plan at work. You are considered covered if you are an active participant in a plan like a 401(k) or pension plan, which your employer indicates on your Form W-2 in the “Retirement Plan” box.

If you are not covered by a workplace retirement plan, you can deduct the full amount of your contributions up to the annual limit. This is true regardless of how much you earn.

If you are covered by a retirement plan at work, your ability to deduct contributions is determined by your Modified Adjusted Gross Income (MAGI). MAGI is your Adjusted Gross Income (AGI) with certain deductions added back. For 2025, the deduction is phased out over a specific MAGI range depending on your filing status.

For a single filer, this phase-out range is between $79,000 and $89,000. For those married filing jointly, the range is $126,000 to $146,000. A “phase-out” means if your MAGI falls within this range, you can only take a partial deduction, and if it exceeds the upper limit, you cannot take any deduction.

To calculate a partial deduction, consider a single individual under 50 with a MAGI of $84,000 in 2025. This amount is $5,000 into the $10,000 phase-out range. You would divide this amount by the size of the range ($5,000 / $10,000 = 0.5), then multiply that result by the maximum contribution ($0.5 x $7,000 = $3,500). This $3,500 represents the non-deductible portion, meaning the remaining $3,500 is the amount they can deduct.

Spousal IRA Deduction Rules

Spousal IRA rules allow a working spouse to contribute to an IRA for a partner with little or no earned income. The total contributions for both spouses cannot exceed their combined earned income, and each individual’s account is subject to the annual contribution limit.

The deductibility of these contributions depends on the couple’s joint income and whether either spouse is covered by a workplace retirement plan. If neither spouse is covered by a plan at work, contributions for both are fully deductible, regardless of income.

A unique set of rules applies when the spouse making the contribution is not covered by a workplace plan, but their partner is. The deduction for the non-covered spouse is subject to a different, much higher MAGI phase-out range. For 2025, for a married couple filing jointly, this range is between $236,000 and $246,000.

If the couple’s MAGI is below $236,000, the non-covered spouse’s contribution is fully deductible. If their MAGI falls within the range, the deduction is partially reduced, and if it exceeds $246,000, no deduction is allowed for the non-covered spouse’s contribution.

Non-Deductible Contributions and Roth IRA Considerations

When your income is too high to permit a deduction for your Traditional IRA contribution, you can make the contribution on a non-deductible basis. This means you contribute after-tax money to the account, and while it will grow tax-deferred, you will not receive an immediate tax break. Anyone with earned income can make a non-deductible contribution up to the annual limit, as there are no income restrictions for this action.

You must track all non-deductible contributions by filing IRS Form 8606, Nondeductible IRAs, with your tax return each year you make one. This form establishes your “cost basis” in the IRA. Failing to file this form can lead to the IRS treating your entire withdrawal as taxable, effectively taxing your non-deductible contributions a second time.

For individuals phased out of the Traditional IRA deduction, a Roth IRA is a common alternative. Contributions to a Roth IRA are never tax-deductible, but qualified withdrawals in retirement are completely tax-free, meaning both contributions and earnings can be withdrawn without federal income tax.

Eligibility to contribute directly to a Roth IRA is also based on MAGI. For 2025, the ability to contribute for a single filer phases out with a MAGI between $150,000 and $165,000. For married couples filing jointly, the range is between $236,000 and $246,000. If your income is too high to deduct a Traditional IRA contribution but low enough to contribute to a Roth IRA, the Roth often becomes the preferred retirement savings vehicle.