Yes, if you are able to contribute to a traditional IRA then you may be able to reduce your taxable income since traditional IRA contributions may be tax-deductible.
In your case you should be able to deduct the full $7,000 (assuming you are older than 50) since your MAGI is less than $196,000.
A traditional IRA contribution deduction is limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please see IRA deduction limits for details.
Please be aware contribution to a Roth IRA are never deductible.
Yes, your wife should continue to contribute to her 401k and then you can contribute to a traditional IRA in 2021. Please review IRA deduction limits for 2021.
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