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includable in the taxpayer’s gross income for such year. Sec.
219(b)(1). For 2004, the deductible amount was $3,000, increased
to $3,500 if the taxpayer was age 50 or older before the close of
the taxable year.4 Sec. 219(b)(5)(A) and (B).
If, however, for any part of a taxable year, a taxpayer or a
taxpayer’s spouse is an “active participant” in a qualified plan
under section 401(a), the deductible amount of any IRA
contribution for that year may be further limited. See sec.
219(a), (g)(1), and (5). As relevant in this case, the IRA
deduction phases out for taxpayers whose modified adjusted gross
incomes exceed certain thresholds, with a complete disallowance
after $75,000 in 2004. See sec. 219(g)(2) and (3)(B)(i). Both
petitioners were active participants in a qualified plan (Mrs.
Hedrick throughout 2004, and Mr. Hedrick for the first 5 months
of 2004), and their adjusted gross income exceeded $75,000.
Therefore the entire $3,500 deduction is disallowed.
Petitioners’ confusion in this case arises from the fact
that Mr. Hedrick was considered an active participant for the
entire taxable year, even after he retired from the school
system. It is easy to see how petitioners could be confused by
language in various Internal Revenue Service publications
explaining that receiving benefits from a former employer’s plan
does not mean that one is covered by, or an active participant
4 Mr. Hedrick met the age requirement for the $500 increase
in allowable contributions.
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Last modified: November 10, 2007