[ghoul79]

Hi

I was a foreign student on F1 and have been working on OPT since Jun 2006. My company has a 401K plan though I could not contribtute much after graduation(had debts to pay off). Now I have some cash and I wanted to put it into IRAs to take the deduction for IRA. My AGI works out to 32500 so I am good either filing as Single or Married (my wife is on F2 and not working) However I have to file as Married Other on the 1040NR in order to take exemptions for my wife and my son(born in US). Now for standard deduction purposes Married Other status is treated as Married Filing Separately and only 5150 is allowed as deduction though I get 3 exemptions one each for me , my wife and my son.
The problem arises is that if one has a 401K and is filing married filing separate the IRA deduction phases out from 0 to 10000. Now I can understand this clause is there to prevent couples earning 2 incomes from both taking the IRA deduction. However in my case my total is so less I would qualify even if filing single much less Married filing jointly and my wife doesn't work but unfortunately if I read my limit as the limit for married filing separately I cannot take this deduction.
I am wondering whether any of the two following cases are valid strategies.
1) File as Single- I won't be able to take the exemption for my wife . I am not sure about my son as there is no head of household status in 1040NR
2) As I put only 3100 into 401K if I am willing to not deduct 401K can I then instead use the whole 8000 of IRA deductions (4000 each for me and for spousal IRA)

[AtlantaTaxExpert]

#2 FIRST:

Unfortunately, since you have contributed to the 401K, you cannot retroactively choose NOT to participate in the 401K. That decision has already been made. Sorry!

ITEM #1:

The limit of $4,000 for yourself and $4,000 for your spouse is for the deduction, not the contribution. Thus, you can contribute to the IRA and report it on Form 8606 as a non-deductible contribution. If you wish, you CAN still claim your son if you choose to file SINGLE instead of Married Other. However, I really see no logic in that approach, as you will be forfeiting a $3,300 deduction in order to contribute $4,000 to achieve the $4,000 deduction.

BOTTOM LINE: File Married Other and claim your wife as a dependent. If you wish, contribute to the IRA on a non-deductible basis. Better still, ask if you can make a late contribution to your compnay's 401K for 2006.