New law expands IRA deduction for homemakers.

• Author: Brinker, Thomas M.
• Position: Brief Article

The Taxpayer Relief Act of 1997 (TRA '97) made significant changes to the rules governing individual retirement accounts (IRAs). Although most of the prior law still applies to traditional or regular IRAs, the definition of active participation has changed.

Revised Sec. 219(g)(1) and new Sec. 219(g)(7) limit a plan participant's active participation status, by not extending active participation status to homemaker spouses. Prior to the TRA '97, a homemaker was regarded as an active participant if his spouse was an active participant. The change in definition allows most homemakers to take a $2,000 deduction for a contribution to an IRA, regardless of whether their spouses are covered under a retirement plan at work.

As with most IRA provisions, the TRA '97 did impose income phase-out limitations effective for 1998. The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, will now be phased out at adjusted gross income (AGI) between $150,000 and $160,000. There is no IRA deduction if the couple's AGI equals or exceeds $160,000 with an active participant spouse.

Example 1: A is covered by a Sec. 401(k) plan at his employment. A's spouse, B, is a full-time homemaker. In 1998, A and B file a joint income tax return with an AGI of $175,000. Neither A nor B is entitled to make a...