[Oneday]

I’m having problem understanding this problem:

Rita Spano is an active participant in a company retirement plan. Her husband, John, age 45, works for a company that does not have a retirement plan. The Spanos’ joint adjusted gross income for 2015 is $187,000. John contributes $4,000 to an IRA for himself. How much of this $4,000 contribution for John can the Spanos deduct on their 2015 joint return?

A.$4,000

B.$3,200

C.$2,000

D.$0

Correct answer is B

Explanation:

Beginning in 1998, individuals are not considered participants in a company retirement plan simply because their spouses are. However, the maximum deductible IRA contribution for a nonparticipant spouse is phased out for couples with joint return adjusted gross incomes between $183,000 and $193,000.

Calculation for reduced IRA contribution:

1) Modified AGI $ 187,000

– 183,000

2) Difference between AGI and phaseout $ 4,000

Full contribution limit / 10,000

3) Reduction factor 0.400

4) Maximum contribution ($4,000 x 2) $ 8,000

Reduction factor x 0.400

Reduction amount $ 3,200

My Question:

1. I don’t understand why “Full contribution limit” is 10,000 and why we need to get that “reduction factor”. I don’t even know what that is… Not covered in Roger (this question is from Ninja MCQ). Isn’t current full contribution $5,500 per person?

I also don’t understand why you multiply $4,000 and get “Maximum contribution” of $8,000.

Please help!