Final answer:
The deductible contribution to a traditional IRA can be reduced based on the taxpayer's adjusted gross income. Understanding how IRA contributions affect adjusted gross income is crucial for maximizing tax benefits.
Step-by-step explanation:
The amount of deductible contribution to a traditional IRA for an unmarried taxpayer under 50 may be reduced based on the taxpayer's adjusted gross income (AGI) for the year. The IRS sets income ranges where the deductibility of IRA contributions begins to phase out. For those within a certain income range, the deduction they're eligible for begins to decrease and eventually is eliminated entirely if their AGI is too high. The concept of AGI is important as it is not just the total income but the income after specific adjustments are made. It includes wages, interest, and dividends, but it can be lowered by things such as contributions to certain retirement accounts and alimony payments. It's also pertinent to note that the marginal tax rates vary with factors like marital status, family size, and of course, income;
These rates define how much tax is owed in addition to the underlying tax on the income earned within a certain bracket. The basic computation of income tax starts with the adjusted gross income, and then deductions and exemptions are subtracted to arrive at the taxable income. A traditional IRA contribution can be one of the deductions that lowers taxable income. Thus, when planning retirement savings, understanding the interplay between IRA contributions and adjusted gross income is crucial for maximizing potential tax benefits.