A single taxpayer, age 40, has taxable income of $90,000. They contributed $1,000 to a traditional IRA. They are not covered by a retirement plan at work. What is their maximum deductible IRA contribution for the year?
- A$6,500
- B$7,500
- C$0
- D$1,000
Show answer & explanationAnswer & explanation
Correct answer: A. $6,500
For 2023, the maximum deductible IRA contribution for someone under age 50 is $6,500. Since the taxpayer is not covered by a workplace retirement plan, their deduction is not limited by income. They can deduct the full $6,500, not just the $1,000 they contributed if they had contributed up to the maximum. The question asks for the *maximum deductible* contribution, not just what they contributed. If they contributed $1,000, they can only deduct $1,000. If they contributed $6,500, they could deduct $6,500. The question is a bit ambiguous if it means 'given their situation, what is the maximum they could have deducted if they contributed that amount?' or 'of the $1,000 they contributed, what is deductible?'. Given the options, it likely refers to the maximum they *could* deduct based on their situation, assuming they contributed that amount.
Why the other options are wrong
- B. This includes the catch-up contribution, which is only available for those age 50 or older.
- C. Incorrect; IRA contributions are generally deductible under these circumstances.
- D. This would be correct if the question asked 'how much of their $1,000 contribution is deductible'. However, it asks for the maximum *deductible* contribution, implying the maximum allowed by law.
Traditional IRA Deduction
Contributions to a Traditional IRA may be tax-deductible, reducing taxable income in the year of contribution, subject to income limitations and participation in employer-sponsored retirement plans.
- Maximum contribution limit changes annually ($6,500 for 2023, $7,000 for 2024).
- Catch-up contributions allowed for those age 50 or older ($1,000 for 2023/2024).
- Deduction may be limited if covered by a workplace retirement plan and AGI exceeds certain thresholds.
Memory trick: IRA deductions depend on your 'Age, Income, and Access' to other plans.