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For 2008, Val and Pat White filed a joint return.
Val earned $35,000 in wages and was covered
by his employer's qualified pension plan.
Pat was unemployed and received $5,000 in alimony
payments for the first 4 months of the year before remarrying.
The couple had no other income.
Each contributed $5,000 to an IRA account.
The allowable IRA deduction on their 2008 joint tax
Choice "a" is correct.
In 2008, taxpayers can contribute and deduct up to $5,000 per year to an
IRA, and alimony is considered earned income for IRA purposes.
For couples filing a joint return
where at least one spouse is an active participant in a retirement plan, the deductible portion of
the contribution is phased out.
For a spouse who is an active participant, the phase out range in
2008 begins at $85,000.
For a spouse who is not an active participant, but is married to someone
who is, the phase out range begins at $159,000.
The earned income for IRA purposes here is
$40,000 ($35,000 + $5,000) which is below both phaseout ranges, so each spouse receives the
full $4,000 deduction.
Choice "b" is incorrect.
Pat's alimony is deemed "earned income" for the IRA contributions.
However, even if Pat had no earned income, a spouse with no earned income can deduct $5,000,
provided the couple's combined earned income is at least $10,000.
Choice "c" is incorrect.
The $2,000 was a pre-2002 rule for IRA contribution limits for individuals
and is a distractor in this case.
Choice "d" is incorrect.
When a taxpayer or taxpayer's spouse is an active participant in a
pension plan at work, the full deduction is allowed if the earned income of the couple is below the
phaseout ranges (as is in this case).