Publication 554 (2005), Older Americans' Tax Guide

3. Adjustments to Income

Table of Contents

Individual Retirement Arrangement (IRA) Contributions and Deductions

You may be able to subtract amounts from your total income (Form 1040, line 22 or Form 1040A, line 15) to get your adjusted gross income (Form 1040, line 37 or Form 1040A, line 21). Some adjustments to income follow.

Contributions to your individual retirement arrangement (IRA) (Form 1040, line 32, or Form 1040A, line 17), explained later in this publication.
Certain moving expenses (Form 1040, line 26) if you changed job locations or started a new job in 2005. See Publication 521, Moving Expenses, or see Form 3903, Moving Expenses, and its instructions.
Some health insurance costs (Form 1040, line 29) if you were self-employed and had a net profit for the year, or if you received wages in 2005 from an S corporation in which you were a more than 2% shareholder. For more details, see Publication 535, Business Expenses.
Payments to your self-employed SEP, SIMPLE, or qualified plan (Form 1040, line 28). For more information, including limits on how much you can deduct, see Publication 560, Retirement Plans for Small Business.
Penalties paid on early withdrawal of savings (Form 1040, line 30). Form 1099-INT, Interest Income, or Form 1099-OID, Original Issue Discount, will show the amount of any penalty you were charged.
Alimony payments (Form 1040, line 31a). For more information, see Publication 504, Divorced or Separated Individuals.

There are other items you can claim as adjustments to income. These adjustments are discussed in the Form 1040 instructions.

Individual Retirement Arrangement (IRA) Contributions and Deductions

This section explains the tax treatment of amounts you pay into traditional IRAs. A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. For more detailed information, see Publication 590.

Contributions. An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. Two advantages of a traditional IRA are:

You may be able to deduct some or all of your contributions to it, depending on your circumstances, and
Generally, amounts in your IRA, including earnings and gains, are not taxed until distributed.

Although interest earned from your traditional IRA generally is not taxed in the year earned, it is not tax-exempt interest. Do not report this interest on your tax return as tax-exempt interest.

General limit. The most that can be contributed for any year to your traditional IRA is the lesser of the following amounts.

Your compensation that you must include in income for the year, or
$4,000 ($4,500 if you were age 50 or older by the end of 2005).

Contributions to spousal IRAs. In the case of a married couple filing a joint return, up to $4,000 ($4,500 for each spouse age 50 or older by the end of 2005) can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation.

For more information on the general limit and the spousal IRA limit, see How Much Can Be Contributed? in Publication 590.

Deductible contribution. Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or spousal IRA limit, if applicable) just explained. However, if you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. Your deduction may be reduced or eliminated, depending on your filing status and the amount of your income.

Nondeductible contribution. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. You must file Form 8606, Nondeductible IRAs, to report nondeductible contributions even if you do not have to file a tax return for the year.

Roth IRA. Regardless of your age, you may be able to establish and contribute to a Roth IRA. You cannot claim a deduction for any contributions to a Roth IRA. But, if you satisfy the requirements, all earnings are tax free and neither your nondeductible contributions nor any earnings on them are taxable when you withdraw them.