Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 15

IRA and HSA Contributions

The tax law encourages savings—for retirement, medical costs, and other purposes—by offering special tax incentives. These incentives generally are claimed as adjustments (reductions) to gross income, which are available regardless of whether a taxpayer uses the standard deduction or itemizes deductions.

Claiming these adjustments means that Form 1040, U.S. Individual Income Tax Return, generally must be used. A taxpayer cannot use Form 1040A to deduct a contribution to a health savings account (HSA) or Form 1040-EZ to deduct contributions to either an HSA or an individual retirement account (IRA).

IRAs are a tax-advantaged way to save for retirement. A taxpayer can make deductible or nondeductible contributions to a traditional IRA. Earnings in the IRA grow tax deferred. Distributions from IRAs, which are discussed in Chapter 8, generally are taxed in the year of distribution. However, if a nondeductible contribution was made to an IRA, it is not taxed again upon distribution.

One form of after-tax, or nondeductible, IRA, is the Roth IRA. Unlike contributions to a traditional IRA, taxpayers may not deduct their contributions to a Roth IRA. However, taxpayers can take tax-free distributions from Roth IRAs if certain conditions are met.

Another tax-advantaged savings account is an HSA, used to pay for medical costs. This account offers triple tax savings: Taxpayers may deduct contributions to the HSA, earnings on the funds are tax deferred, ...