4. HOW MUCH CAN I CONTRIBUTE AND DEDUCT? As soon as your IRA is set up, you can make contributions (put money in) to it through your chosen sponsor (trustee or other administrator). Contributions must be in the form of money (cash, check or money order). You cannot contribute property. However, you may be able to transfer or roll over certain property from one account to another. See the discussion of rollovers and other transfers in Chapter 5. You can make contributions to your IRA each year that you qualify. To qualify to make contributions you must have compensation (as discussed in Chapter 2) and have not reached age 70 1/2 during the year. Thus, for any year in which you do not work, you cannot make IRA contributions unless you receive alimony. Even if you do not qualify to make contributions for the current year, the amounts you contributed for years in which you did qualify can remain in your IRA. You can resume making contributions for any years that you qualify. You can make contributions to a spousal IRA each year that the spousal IRA requirements are met. See IRA for your spouse in Chapter 2. There are limits and other rules that affect the amount you can contribute and the amount you can deduct. This chapter discusses those rules. Contribution Limits The most that you can contribute for any year to your IRA is the smaller of the following amounts: o Your compensation (defined in Chapter 2) that you must include in income for the year, or o $2,000. This is the most you can contribute regardless of whether your contributions are to one or more IRAs or whether all or part of your contributions are nondeductible (see Nondeductible Contributions , later). Examples. Betty, who is single, earns $24,000 in 1992. Her IRA contributions for 1992 are limited to $2,000. John, a college student working part time, earns $1,500 in 1992. His IRA contributions for 1992 are limited to $1,500, the amount of his compensation. Spousal IRA. The total combined contributions you can make each year to your IRA and a spousal IRA (discussed earlier) is the smaller of: o $2,250 or o Your taxable compensation for the year. You can divide your IRA contributions between your IRA and the spousal IRA in any way you choose, as long as you do not contribute more than $2,000 to either IRA (see examples in next discussion). Spouse has compensation during the year. If your spouse also has taxable compensation during the year and each of you is under age 70 1/2 at the end of the year, you and your spouse can each have regular IRAs. You each may contribute up to the $2,000 limit, unless your taxable compensation (or your spouse's) is less than $2,000. However, either you or your spouse can choose to be treated as having no compensation and use the rules for spousal IRAs. Generally, if one spouse has compensation of less than $250 for the year, a spousal IRA is more advantageous than a regular IRA. Example 1. Bill and Linda file a joint return for 1992. Bill earned $27,000 and Linda earned $190 that year. Linda chose to be treated as having no compensation; therefore, Bill set up a spousal IRA for her. Since he contributed $1,800 to his IRA, the most he can contribute to the spousal IRA is $450 ($2,250 minus $1,800). Example 2. Assume the same facts as in Example 1 except Bill's contribution to the spousal IRA is $2,000 (the limit for either IRA). The most he can contribute to his own IRA is $250 ($2,250 minus $2,000). Spouse under age 70 1/2. You cannot make contributions to your IRA for the year you reach age 70 1/2 or any later year. However, for any year you have compensation, you can continue to make contributions of up to $2,000 to a spousal IRA until the year your spouse reaches age 70 1/2 . Contributions not required. You are not required to make contributions to your IRA or a spousal IRA for every tax year, even if you can. Less than maximum contributions. If your contributions to your IRA for a year were less than the smaller of 100% of your compensation or $2,000, you cannot contribute more in a later year to make up the difference. Example. Paul earns $30,000 in 1992. Although he can contribute up to $2,000 for 1992, he contributes only $1,000. Paul cannot make up the $1,000 ($2,000 - $1,000) difference between his actual contributions for 1992 and his 1992 limit by contributing an additional $1,000 in 1993 or any later year. More than one IRA. If you have more than one IRA, the limit applies to the total contributions made to your IRAs for the year. Both spouses have compensation. If both you and your spouse have compensation, each of you can set up an IRA. Both of you cannot participate in the same IRA. The maximum contribution for each of you is figured separately and depends on how much each of you earns. Filing status has no effect on the amount of the permitted contribution to an IRA. However, if you or your spouse is covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. See Deductible Contributions, later. Example. Sam and Helen are married. They both work and each has an IRA. Sam earned $1,800 and Helen earned $28,000 in 1992. Sam can contribute to his IRA up to $1,800 for the year. Helen can contribute up to $2,000 to her IRA. Whether they file a joint return or separate returns, the amount they can contribute is the same. IRA contributions under community property laws. If you work and have an IRA, contributions cannot be made to your IRA based on the earnings of your spouse, unless you have a spousal IRA. The contributions must be based on your own compensation, even in community property states. Inherited IRAs. If you inherit an IRA from your spouse, you can choose to treat it as your own by: o Making contributions to that IRA, or o Not making required distributions as a beneficiary, as explained in Chapter 6. If, however, you inherit an IRA from someone who died after December 31, 1983, and you are not the decedent's spouse, you cannot contribute to that IRA, because you cannot treat it as your own. See also Inherited IRA(s), under Rollovers in Chapter 5 and under Other Special IRA Situations in Chapter 6. Annuity or endowment contracts. If you invest in an annuity or endowment contract under an individual retirement annuity, you cannot contribute more than $2,000 toward its cost for the tax year, including the cost of life insurance coverage. If you contribute more than $2,000, the annuity or endowment contract is disqualified. Broker's commissions. Broker's commissions that you paid in connection with your IRA are subject to the contribution limit and are not deductible as a miscellaneous deduction on Schedule A (Form 1040). Trustee's fees. Trustee's administrative fees that are billed separately and paid by you in connection with your IRA are deductible. They are deductible (to the extent they are ordinary and necessary) as a miscellaneous deduction on Schedule A (Form 1040). The deduction is subject to the 2% of adjusted gross income limit. These fees are not subject to the contribution limit. When to Contribute You can make contributions to your IRA (or to a spousal IRA) for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 1992 must be made by April 15, 1993. Designating year for which contribution is made. If you contribute an amount to your IRA between January 1, 1993, and April 15, 1993, you must tell the sponsor which year (1992 or 1993) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor must assume, for reporting to the IRS, that the contribution is for 1993, the year the sponsor received it. Filing before making your contribution. You can file your return claiming an IRA contribution before you actually make the contribution. You must, however, make the contribution by the due date of your return, not including extensions. Deductible Contributions Generally, you can take a deduction for the contributions that you are allowed to make to your IRA. However, if you or your spouse are covered by an employer retirement plan at any time during the year, your allowable IRA deduction may be less than your allowable contributions. Your allowable deduction may be reduced or eliminated, depending on the amount of your income and your filing status, as discussed later under Deduction Limits. These limits do not affect your allowable contributions (see Nondeductible Contributions, later). Who is Covered by an Employer Plan? The Form W-2, Wage and Tax Statement, you receive from your employer includes a box to indicate whether or not you are covered for the year. The form should have a mark in the "Pension Plan" box if you are covered. If you are not certain whether you are covered by your employer's retirement plan, you should ask your employer. Employer Plans An employer retirement plan is one that an employer sets up for the benefit of its employees. For purposes of the IRA deduction rules, an employer retirement plan is any of the following: o A qualified (meets Internal Revenue Code requirements) pension, profit-sharing, stock bonus, money purchase, etc., plan (including Keogh plans), o A 401(k) plan (generally an arrangement included in a profit-sharing or stock bonus plan that allows you to choose to take part of your compensation from your employer in cash or have your employer pay it into the plan), o A union plan (a qualified stock bonus, pension, or profit-sharing plan created by a collective bargaining agreement between employee representatives and one or more employers), o A qualified annuity plan, o A plan established for its employees by the United States, a state or political subdivision thereof, or by an agency or instrumentality of any of the foregoing (other than an eligible state deferred compensation plan (section 457 plan)), o A tax-sheltered annuity plan for employees of public schools and certain tax-exempt organizations (403(b) plan), o A simplified employee pension (SEP) plan, or o A 501(c)(18) trust (a certain type of tax-exempt trust created before June 25, 1959, that is funded only by employee contributions), if you made deductible contributions during the year. When Are You Covered? Special rules apply to determine whether you are considered to be covered by (an active participant in) a plan for a tax year. These rules differ depending on whether the plan is a defined contribution or defined benefit plan. They also differ because of your marital status. Defined contribution plan. Generally, you are considered covered by a defined contribution plan if amounts are contributed or allocated to your account for the plan year that ends within your tax year. A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Benefits are based only on amounts contributed to or allocated to each account. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Example. Company A has a money purchase pension plan. Its plan year is from July 1 to June 30. The plan provides that contributions must be allocated as of June 30. Bob, an employee, leaves Company A on December 30, 1991. The contribution for the plan year ending on June 30, 1992, is not made until February 15, 1993 (when Company A files its corporate income tax return). In this case, Bob is considered covered by the plan for his 1992 tax year. Defined benefit plan. If you are eligible (meet minimum age and years of service requirements) to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are considered covered by the plan. This rule applies even if you declined to be covered by the plan, you did not make a required contribution, or you did not perform the minimum service required to accrue a benefit for the year. A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on a computation of what contributions are necessary to provide definite benefits to plan participants. Defined benefit plans include pension plans and annuity plans. Example. John, an employee of B, is eligible for coverage under B's defined benefit plan with a July 1 to June 30 plan year. John leaves B on December 30, 1991. Since John is eligible for coverage under the plan for its year ending June 30, 1992, he is considered covered by the plan for his 1992 tax year. Nonvested employees. If, for a plan year, an amount is allocated to your plan account in a defined contribution plan, or you accrue a benefit in a defined benefit plan, but you have no vested interest (legal right) in such account or accrual, you are still covered by such plan as an active participant. Marital status. Generally you are considered covered by an employer retirement plan because your spouse is covered by one. To determine whether you are considered covered by an employer retirement plan for the tax year because of your spouse's coverage, you must wait until the last day of the year. This is because your filing status (whether you are considered married or single) for the year depends on your marital status on the last day of the tax year. If you were married to two different spouses during the same year, you are considered married for the year, for this purpose, to the spouse to whom you were married at the end of the year. If your spouse died during the year, and you file a joint return as the surviving spouse, coverage by an employer retirement plan for that year is determined as if your spouse were still alive. If you are married filing a joint return. Both you and your spouse are considered covered by a plan if either of you is covered by a plan and you file a joint return. If you are married filing a separate return and you are not covered by an employer retirement plan, but your spouse is, you are considered covered if you and your spouse lived together at any time during the year. Federal judges are considered covered by an employer retirement plan in figuring the IRA deduction. When Are You Not Covered? You are not covered by an employer plan if neither you nor your spouse is covered for any part of the year. You are also not covered for this purpose in the following situations. If you are married filing a separate return and you are not covered by an employer retirement plan, you can be considered not covered, even if your spouse is covered by a plan. This rule applies only if you and your spouse did not live together at any time during the year. Coverage under social security or railroad retirement (Tier I and Tier II) does not count as coverage under an employer retirement plan in figuring the IRA deduction. If you receive retirement benefits from a previous employer's plan and you are not working and covered under another employer plan, you are not considered covered by a plan in figuring the IRA deduction. Reservists and volunteer fire fighters. Certain members of the reserve units of the Armed Forces (in general, those members who did not serve in excess of 90 days during the year) and certain volunteer fire fighters (in general, those members whose accrued retirement benefits at the beginning of the year will not exceed $1800 per year at retirement) are not considered covered by U.S. or local government retirement plans. Social Security Recipients If you receive social security benefits, have taxable compensation, contribute to your IRA, and are covered (or considered covered) by an employer retirement plan, complete the worksheets in Appendix B of this publication. Use these worksheets to figure your IRA deduction and the taxable portion, if any, of your social security benefits. Deduction Limits As discussed under Deductible Contributions, the deduction you can take for contributions made to your IRA depends on whether you or your spouse is covered for any part of the year by an employer retirement plan. But your deduction is also affected by how much income you have and your filing status, as discussed below under Adjusted Gross Income Limitation. Full deduction. If neither you nor your spouse is covered for any part of the year by an employer retirement plan, you can take a deduction for your total contributions to one or more IRAs of up to $2,000, or 100% of compensation, whichever is less. This amount is reduced by any contributions to a 501(c)(18) plan (generally, a plan created before June 25, 1959, funded entirely by employee contributions). Reduced or no deduction. If either you or your spouse is covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. The amounts vary depending on your filing status. Adjusted Gross Income Limitation The effect of income on your deduction, as just described, is sometimes called the adjusted gross income limitation (AGI limit). To compute your reduced IRA deduction, you must first determine your modified adjusted gross income and your filing status. Modified adjusted gross income (modified AGI) is: o If you file Form 1040 - the amount on the page 1 "adjusted gross income" line, but modified (changed) by figuring it without taking any: a) IRA deduction, b) Foreign earned income exclusion, c) Foreign housing exclusion or deduction, or d) Exclusion of series EE bond interest shown on Form 8815. o If you file Form 1040A - the amount on the page 1 "adjusted gross income" line, but modified by figuring it without any IRA deduction, or any exclusion of series EE bond interest shown on Form 8815. Note: Do not assume that modified AGI is the same as your compensation. You will find that your modified AGI may include income in addition to your taxable compensation such as Income from IRA distributions, next. Income from IRA distributions. If you received IRA distributions in 1992 and the IRA includes only deductible contributions, the distributions are fully taxable. If you made contributions for 1992 that may be nondeductible contributions (discussed later), depending on whether your IRA deduction for that year is reduced (see Deduction phaseout, later), the distributions may be partly tax-free and partly taxable. In that case, you must figure the taxable part of the IRA distribution before you can figure your modified AGI. To do this, you can use the Worksheet to Figure Taxable Part of Distribution, under Tax Treatment of Distributions in Chapter 6. Filing status. Your filing status depends primarily on your marital status. For this purpose you need to know if your filing status is single (or head of household), married filing jointly (or qualifying widow(er)), or married filing separately. Married filing separate exception. If you did not live with your spouse at any time during the year and you file a separate return, your filing status is considered, for this purpose, as single. Deduction phaseout. Your IRA deduction is reduced or eliminated entirely depending on your filing status and modified AGI as follows: Your IRA deduction deduction is reduced if your is eliminated modified AGI is if your If your filing within the phaseout modified AGI status is: range of: is: Single, or $25,000.01 - $35,000 $35,000 Head of or more household Married-joint $40,000.01 - $50,000 $50,000 return, or or more Qualifying widow(er) Married- $ 0.01 - $10,000 $10,000 separate or more return How to Figure Your Reduced IRA Deduction If you are covered or considered covered by an employer retirement plan and your modified AGI is within the phaseout range for your filing status (see above table), your IRA deduction must be reduced. You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the following worksheet. Also, the instructions for these tax forms include an IRA Worksheet 2, which you can use instead. Note: If you were married and both you and your spouse worked and you both contributed to IRAs, figure the deduction for each of you separately. If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions you made to your spouse's IRA. After a divorce or legal separation, you can deduct only the contributions you made to your own IRA and your deductions are subject to the adjusted gross income limitation under the rules for single individuals. Deductible (and nondeductible) IRA contributions for an IRA other than a spousal IRA. Complete lines 1 through 8 to figure your deductible and nondeductible IRA contributions for the year. Worksheet for Reduced IRA Deduction (Use only if you are covered, or considered covered, by an employer plan and your modified AGI is within the applicable phaseout range) If your And your Enter on filing status modified AGI line 1 is: is over: below: Single, or Head $25,000 $35,000 of household Married-joint $40,000 $50,000 return, or Qualifying widow(er) Married-separate $ -0- $10,000 return 1. Enter applicable amount from above.....................------ 2. Enter your modified AGI (combined, if married filing jointly)........................................------ Note: If line 2 is equal to or more than the amount on line 1, stop here; your IRA contributions are not deductible; see Nondeductible Contributions, later. 3. Subtract line 2 from 1. (If line 3 is $10,000 or more, stop here; you can take a full IRA deduction for contributions of up to $2,000 or 100% of your compensation, whichever is less.)......................------ 4. Multiply line 3 by 20% (.20). If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.............................................------ 5. Enter your compensation. (Do not include your spouse's compensation, and, if you file Form 1040, do not reduce your compensation by any losses from self-employment.).....................................------ 6. Enter contributions you made, or plan to make, to your IRA for 1992, but do not enter more than $2,000. (If contributions are more than $2,000, see Excess Contributions in Chapter 7.)....................------ 7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. (If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8.).........................................------ 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 2 of your Form 8606. (See Nondeductible Contributions, later.)...................------ Deductible (and nondeductible) IRA contributions for a spousal IRA. The deduction phaseout rules that reduce or eliminate your IRA deduction also apply to a spousal IRA. If you have a spousal IRA, are covered by an employer retirement plan, and your modified AGI is within the phaseout range, you can take only a reduced spousal IRA deduction. Complete lines 9 through 17 to figure deductible and nondeductible contributions (discussed later) for the year to a spousal IRA. 9. Enter the smaller of (a) $2,250 or (b) the amount from line 5............................................------ 10. Add lines 7 and 8. Enter the total. (If this amount is equal to or more than line 9, stop here; you cannot make contributions to a spousal IRA. Also, see Excess Contributions in Chapter 7, later.).........------ 11. Subtract line 10 from line 9...........................------ 12. Enter the smallest of (a) IRA contributions for 1992 to your spouse's IRA; (b) $2,000; or (c) the amount on line 11. (If contributions are more than $2,000, see Excess Contributions, later.)......................------ 13. Multiply line 3 by 22.5% (.225). If the result is not a multiple of $10, round it to the next highest multiple of $10. However, if the result is less than $200, enter $200.......................................------ 14. Enter the amount from line 7...........................------ 15. Subtract line 14 from line 13. Enter the result but do not enter more than the amount on line 12...........------ 16. Spousal IRA deduction. Compare lines 4, 5, and 15. Enter the smallest amount (or a smaller amount if you choose) here and on your Form 1040 or 1040A. (If line 12 is more than line 16 and you want to make a nondeductible contribution for your spouse, go to line 17.)..............................................------ 17. Spousal IRA nondeductible contributions. Subtract line 16 from line 12. Enter the result here and on line 2 of your spouse's Form 8606......................------ Reporting Deductible Contributions You do not have to itemize deductions to claim your deduction for IRA contributions. For Form 1040, deduct your IRA contributions for 1992 on line 24a and, if you file a joint return, deduct your spouse's IRA contributions on line 24b. For Form 1040A, deduct your contributions on line 15a and, if you file a joint return, deduct your spouse's IRA contributions on line 15b. You can use either form in most cases. You must use Form 1040 instead of Form 1040A if you owe tax on any early distributions from your IRA, any excess contributions made to your IRA, or any excess accumulations in your IRA account (see Chapter 7, What Acts Result in Penalties?). Form 1040EZ does not provide for IRA deductions. If you are self-employed (a sole proprietor or partner) and have a SEP-IRA, take your deduction for allowable contributions on line 27, Form 1040. Withholding allowances. To figure the number of additional withholding allowances on your Form W-4, Employee's Withholding Allowance Certificate, you can take into account your estimated deductible IRA contributions. For this purpose, however, do not take into account any of your employer's regular contributions to your SEP-IRA, discussed later (they generally are not included in your income and you cannot deduct them). Form 5498. You should receive by May 31, 1993, Form 5498 or a similar statement from plan sponsors, showing all the contributions made to your IRA for 1992. Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated because of the adjusted gross income limitation (see Deductible Contributions, earlier), you can still make contributions to your IRA of up to $2,000 ($2,250 for a regular and a spousal IRA combined) or 100% of compensation, whichever is less. The difference between your total permitted contributions and your total deductible contributions, if any, is your nondeductible contribution. Example. Sonny Jones is single. In 1992, he is covered by a retirement plan at work. His salary is $52,312. His modified adjusted gross income (MAGI) is $55,000. Sonny makes a $2,000 IRA contribution that year. Because he is covered by a retirement plan and his MAGI is above $35,000, he cannot deduct his $2,000 IRA contribution on his 1992 tax return. However, he may choose to either: 1) Designate this contribution as a nondeductible contribution by reporting it on his tax return, as explained later under Reporting Nondeductible Contributions,or 2) Withdraw the contribution as explained later under Tax-Free Withdrawal of Contributions. As long as your contributions are within the contribution limits just discussed, none of the earnings on any contributions (deductible or nondeductible) will be taxed until they are distributed. See Chapter 6, When Can I Withdraw or Use Assets From an IRA? Cost basis. You will also have a cost basis in your IRA if you make nondeductible contributions. Your basis is the sum of the nondeductible amounts you have contributed to your IRA less any distributions of those amounts. When you withdraw (or receive distributions of) these amounts, as discussed later in Chapter 6, you can do so tax-free. Note. Generally, you cannot withdraw only the amounts representing your basis. If you have basis, your withdrawals will generally include both taxable and nontaxable amounts. See Chapter 6 for more information. Reporting Nondeductible Contributions You must report nondeductible contributions, but you do not have to designate a contribution as nondeductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible. To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRA Contributions, IRA Basis, and Nontaxable IRA Distributions. You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. File Form 8606 if: o You made nondeductible contributions to your IRA for 1992, or o You received IRA distributions in 1992 and you have at any time made nondeductible contributions to any of your IRAs. If you do not report nondeductible contributions, all of your IRA contributions will be treated as deductible. Thus, when you make withdrawals from your IRA, the amounts you withdraw will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Penalty for overstatement. If you overstate the amount of your nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. Penalty for failure to file Form 8606. You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. Tax-Free Withdrawal of Contributions If you made IRA contributions in 1992 for 1992, you can withdraw them tax free (except for any earnings on them) by April 15, 1993 (or a later date, if you have an extension to file your return). You can do this if: o You did not take a deduction for the contributions you withdraw, and o You also withdraw any interest or other income earned on the contributions. You must report this income on your 1992 return. The 10 percent additional tax on withdrawals made before you reach age 59 1/2 does not apply to these withdrawals of your contributions. (See Exceptions in Chapter 6.) However, your withdrawal of the interest or other income may be subject to an additional 10% tax on premature distributions. (See Excess Contributions and Premature Distributions (Early Withdrawals) in Chapter 7.) Excess contributions. If any part of these contributions is an excess contribution, it will be subject to a 6% excise tax. You will not have to pay the 6% tax if any 1991 excess contribution is withdrawn by April 15, 1992 (plus extensions), and if any 1992 excess contribution is withdrawn by April 15, 1993 (plus extensions). See Excess Contributions in Chapter 7. Comprehensive Examples - Deductible and Nondeductible Contributions The following examples illustrate the use of the IRA deduction worksheet shown earlier under How to Figure Your Reduced IRA Deduction. Example 1. For 1992, Tom and Betty Smith file a joint return on Form 1040. They both work and Tom is covered by his employer's retirement plan. Tom's salary is $40,000 and Betty's is $6,555. They each have an IRA and their combined modified AGI is $46,555. Since their modified AGI is between $40,000 and $50,000 and Tom is covered by an employer plan, each of them is subject to the deduction limits (see Deduction Limits, earlier). For 1992, Tom contributed $2,000 to his IRA and Betty contributed $500 to hers. Even though they file a joint return, they must use separate worksheets to figure the reduced IRA deduction for each of them. Tom can take a deduction of only $690 (see the worksheet below). Even though he contributed the maximum ($2,000), $1,310 ($2,000 minus $690) of his contributions must be treated as nondeductible. He can choose to treat the $690 as either deductible or nondeductible contributions. He can either leave the $1,310 of nondeductible contributions in his IRA or withdraw them by April 15, 1993. He decides to treat the $690 as deductible contributions and leave the $1,310 of nondeductible contributions in his IRA. Betty can treat all or part of her contributions as either deductible or nondeductible. This is because her $500 contribution for 1992 is less than the $690 deduction limit for her IRA contributions that year (see line 4 of her worksheet, later). She decides to treat her $500 IRA contributions as deductible. Using the Worksheet for Reduced IRA Deduction, Tom figures his deductible and nondeductible amounts as follows: Worksheet for Reduced IRA Deduction (Use only if you are covered or considered covered by an employer plan and your modified AGI is within the applicable phaseout range) If your And your Enter on filing status modified AGI line 1 is: is over: below: Single, or Head $25,000 $35,000 of household Married-joint $40,000 $50,000 return, or Qualifying widow(er) Married-separate $ -0- $10,000 return ------------------------------------------------------------------- 1. Enter applicable amount from above....................$50,000 ------- 2. Enter your modified AGI (combined, if married filing jointly)........................................46,555 ------ Note: If line 2 is equal to or more than the amount on line 1, stop here; your IRA contributions are not deductible; see Nondeductible Contributions, earlier. 3. Subtract line 2 from 1. (If line 3 is $10,000 or more, stop here; you can take a full IRA deduction for contributions of up to $2,000 or 100% of your compensation, whichever is less.)...................... 3,445 ------ 4. Multiply line 3 by 20% (.20). If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200............................................. 690 ------ 5. Enter your compensation. (Do not include your spouse's compensation, and, if you file Form 1040, do not reduce your compensation by any losses from self-employment.)......................................40,000 ------ 6. Enter contributions you made, or plan to make, to your IRA for 1992, but do not enter more than $2,000. (If contributions are more than $2,000, see Excess Contributions in Chapter 7.).................... 2,000 ------ 7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. (If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8.)......................................... 690 ------ 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 2 of your Form 8606................... 1,310 ------ Betty figures her IRA deduction as follows: Worksheet for Reduced IRA Deduction (Use only if you are covered or considered covered by an employer plan and your modified AGI is within the applicable phaseout range) If your And your Enter on filing status modified AGI line 1 is: is over: below: Single, or Head $25,000 $35,000 of household Married-joint $40,000 $50,000 return, or Qualifying widow(er) Married-separate $ -0- $10,000 return -------------------------------------------------------------------- 1. Enter applicable amount from above.....................$50,000 ------- 2. Enter your modified AGI (combined, if married filing jointly)........................................46,555 ------ Note: If line 2 is equal to or more than the amount on line 1, stop here; your IRA contributions are not deductible; see Nondeductible Contributions, earlier. 3. Subtract line 2 from 1. (If line 3 is $10,000 or more, stop here; you can take a full IRA deduction for contributions of up to $2,000 or 100% of your compensation, whichever is less.)...................... 3,445 ------ 4. Multiply line 3 by 20% (.20). If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200............................................. 690 ------ 5. Enter your compensation. (Do not include your spouse's compensation, and, if you file Form 1040, do not reduce your compensation by any losses from self-employment.)...................................... 6,555 ------ 6. Enter contributions you made, or plan to make, to your IRA for 1992, but do not enter more than $2,000. (If contributions are more than $2,000, see Excess Contributions in Chapter 7.).................... 500 ------ 7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. (If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8.)......................................... 500 ------ 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 2 of your Form 8606................... 0 ------ The IRA deductions of $690 and $500 on the joint return for Tom and Betty total $1,190. Betty's unused IRA deduction limit of $190 ($690 minus $500) cannot be transferred to Tom to increase his deduction. Example 2. Assume the same facts as in Example 1, except that Tom contributed $250 to a spousal IRA because Betty had no compensation for the year and did not contribute to an IRA. Their modified AGI remains at $46,555. Tom uses lines 1 through 8 of his worksheet to complete the spousal IRA portion of the Worksheet for Reduced IRA Deduction as follows: 9. Enter the smaller of (a) $2,250 or (b) the amount from line 5............................................$2,250 ------ 10. Add lines 7 and 8. Enter the total. (If this amount is equal to or more than line 9, stop here; you cannot make contributions to a spousal IRA. Also, see Excess Contributions in Chapter 7, later.)......... 2,000 ------ 11. Subtract line 10 from line 9........................... 250 ------ 12. Enter the smallest of (a) IRA contributions for 1992 to your spouse's IRA; (b) $2,000; or (c) the amount on line 11. (If contributions are more than $2,000, see Excess Contributions, later.)...................... 250 ------ 13. Multiply line 3 by 22.5% (.225). If the result is not a multiple of $10, round it to the next highest multiple of $10. However, if the result is less than $200, enter $200....................................... 780 ------ 14. Enter the amount from line 7........................... 690 ------ 15. Subtract line 14 from line 13. Enter the result but do not enter more than the amount on line 12........... 90 ------ 16. Spousal IRA deduction. Compare lines 4, 5, and 15. Enter the smallest amount (or a smaller amount if you choose) here and on your Form 1040 or 1040A. (If line 12 is more than line 16 and you want to make a nondeductible contribution for your spouse, go to line 17.).............................................. 90 ------ 17. Spousal IRA nondeductible contributions. Subtract line 16 from line 12. Enter the result here and on line 2 of your spouse's Form 8606...................... 160 ------ The IRA deductions of $690 and $90 on the joint return for Tom and Betty total $780. In this case, the full spousal IRA deduction of $2,250 (limited to $2,000 for either spouse's IRA) has been reduced by the IRA deduction phaseout rules to $780.