Married Filing Jointly, One W-2 and One Self-Employed, End of Year IRA Contributions Affect Tax Liability Differently?

[JohnJacob]

I'm using TurboTax Home and Business and I'm near the end.  I'm at that part where TurboTax asks if I want to make a last minute contribution to a traditional IRA in order to reduce out taxable income for 2020, and there is that cool calculator that lets you explore how different contributions affect tax owed.

I receive a W-2 from my employer.  My spouse in self-employed, and has a sole-proprietorship.

I noticed that IRA contributions under my name have relatively little affect on our taxes owed; contributions to my spouse's IRA seem to be twice as efficient at reducing our tax liability.

What is the reason for the difference?  I thought the IRS basically saw us as a single taxpaying entity but evidently that is not the case.  Why are contributions to my spouse's traditional IRA nearly twice as effective at reducing our tax liability?

[macuser_22 · Accepted solution]

IRA's are individual for each spouse.

If you are covered by a retirement plan at work (usually indicated by a check mark in box 13 on your W-2), then your MAGI might be high enough to limit or eliminate any IRA deduction.   See the IRS link below for charts and deduction limits for various filing status and MAGI.

The maximum IRA contributions for 2019 is $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year which ever is less.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

[JohnJacob]

@macuser_22  Thanks for that, good to know.  Your post made me look for an IRA contributions calculator.  I was aware that there were contribution limits, but I did not realize that the amount deductible could be less than the max allowable contribution (not sure why someone would put money into an IRA if it's not deductible, that money might as well go into a standard brokerage account where you can access it at any time).

You were right, it's MAGI and the coverage for one of us by the employer-sponsored retirement plan.