Is IRA Deductible on California State Taxes?

Contributions to an individual retirement arrangement, or IRA, that you deduct on your federal income taxes are also deductible on your California state income taxes. However, you don't actually "take" an IRA deduction anywhere on your California tax return. The California return uses your federal adjusted gross income as a starting point for computing your state taxable income -- and your federal AGI already includes your IRA deduction.

If you made contributions to an IRA during the year, the instructions with the federal tax return will explain how much is deductible. Enter the deductible amount on the appropriate line of your federal tax return -- either Line 32 of Internal Revenue Service Form 1040 or Line 17 of IRS Form 1040A; you can't take the IRA deduction if you're filing Form 1040EZ. These lines are in the "Adjusted Gross Income" section of your return; all items in this section get subtracted from your gross income to produce the federal AGI.

After you've calculated your federal AGI, transfer that number to your California tax return. You can do this only if you're filing the standard California tax return, Form 540, or the simplified return, Form 540A. Enter your federal AGI on Line 13 of either form. The ultra-simplified Form 540 2EZ doesn't allow federal adjustments to income -- it makes you recalculate your income from scratch -- so you can't use it if you want the IRA deduction to carry through from your federal return.

Once you've entered your federal AGI, apply "California Income Adjustments" to determine your state taxable income. California Income Adjustments are changes to your federal AGI based on differences between federal and state tax law. If you're using Form 540, fill out a separate form, Schedule CA, to calculate the California adjustments. If you're using Form 540A, calculate the adjustments on the return itself. In most respects, California law is the same as federal law with regard to IRA deductions, so most people won't need to make a California adjustment. However, certain members of the military may be able to increase their deduction with an adjustment.

The federal tax code reduces or eliminates the allowable IRA deduction for taxpayers at higher incomes, and California generally follows the federal lead. However, if you're a permanent California resident who is currently living outside the state while on active duty with the military, you can exclude your military pay from the calculation used to determine whether your deduction must be reduced or eliminated. Recalculate what your deduction would be without your military pay, and claim the difference -- if any -- in Column C, Line 36 of Schedule CA. Write "MPA Adjustment" on the dotted line on Line 36.