Verified answer

for 2008, for a couple filing married filing jointly, a partial deduction is allowed you are covered by a retirement plan at work and your modified AGI is between 85,000 and 105,000. A full deduction is allowed if you are not covered by a retirement plan at work and your spouse is and you modified AGI is less than 159,000. Roths aren't limited until after you modified AGI is greater than 159,000 for a married couple.

I found the worksheet to figure your Modified AGI on page 17 of pub 590. There are certain deductions taken to figure your AGI you have to add back to calculate you modified AGI for the purpose of determing your IRA deduction.

The worksheet to figure your reduced IRA deduction is on page 19 of pub 590. (there is an example on page 22 that is close to your situation) You can contribute the entire amount allowed in the IRA($5000 in 2008 if under 50), but you will need to keep records of any amounts you contributed that arn't deductible. This will reduce the taxable withdrawals when the money is removed from the IRA. The downside to non-deductibe contributions is if you misplace the paperwork you may be out of luck, and you will have to do some extra calculations when you begin to withdraw the money.

A better way to handle it is to put the deductible portion in a Traditional IRA and the non-deductible portion in a Roth IRA.

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The way a IRA deduction works is you will subtract the deduction from your income along with any other deductions on the front of your return to calculate your Adjusted Gross Income. This is the amount brought the the second page/back of the return. and then the standard deduction or itemized deduction and the expemtions are subtracted to reach your taxable income.

They get a partial deduction. See IRS pub 590 for the formula.

To figure out if the deduction is above the line or below the line, go look at a 1040A form.