First, are you or your wife covered by a retirement plan at work? If so, that changes things.
2015
Married filling jointly (no plans at work): $11000 fully deductible, no income limit
Married filling jointly (spouse has plan at work, you don't): $5500 for spouse not covered fully deductible, MAGI less than $183k
Married filling jointly (you have a plan at work): $5500 fully deductible, MAGI less than $98k
source:
http://www.irs.gov/Retirement-Plans/IRA-Deduction-LimitsThat is correct, you do not include the IRA contribution deduction in your calculation of MAGI for this purpose.
Look at publication 590, worksheet 1-2 Figuring your reduced IRA Deduction for the exact formula.
http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230533I think it is a little bit of a personal choice if traditional or Roth is better. In your case, you could calculate the maximum contribution that you could deduct on your taxes, and put the rest into a Roth.