I live in a high-tax state and I am trying to decide between a Roth IRA and a traditional. I think the kicker will whether traditional can lower the state taxes or not

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AutoModerator t1_jeb6j1t wrote on March 30, 2023 at 7:09 PM

#2,496,350

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BouncyEgg t1_jeb717m wrote on March 30, 2023 at 7:12 PM

#2,496,466

First, have you considered whether or not you meet the requirements to actually take the deduction?

Review the charts in this link:

https://www.irs.gov/retirement-plans/ira-deduction-limits

Start there.

Then, if the answer is "Yes, it is deductible at the federal level for me," then reveal which exact state you are referring to.

FourWayFork t1_jeb72ek wrote on March 30, 2023 at 7:12 PM

#2,496,471

Unless your state has really weird tax laws, contributing to an IRA reduces the amount of income that you get taxed on.

So if you make $100K and you contribute $10K to a traditional IRA, then for income tax purposes, you made $90K. (You still have to pay Social Security + Medicare on all $100K.)

This should be the same way for federal and state, though it's possible you live in a state with weird rules and would need to check the rules specifically for your state to make 100% sure that's the case. (I would be stunned if it isn't, though.)

SlipperyWhenDry77 OP t1_jeb7rnv wrote on March 30, 2023 at 7:16 PM

#2,496,613

Replying to BouncyEgg (#2,496,466)

It looks like I should qualify, my income is relatively low. NY state

sciguyCO t1_jebbssh wrote on March 30, 2023 at 7:42 PM

#2,497,583

AFAIK, most if not all states subtract Traditional IRA contributions from the income they consider taxable. How that gets done varies by state. On my own state return (Colorado), I simply copy over the "taxable income" number from my federal return, and since that is after subtracting IRA contributions then I get the same benefit on my state tax bill.

Best as I can tell, the NY tax return pulls over your federal "adjustments to income" (which is where IRA contributions get reported on your federal return) on its line 18 and makes that same subtraction to get your state-level adjusted gross income. I couldn't find anywhere a IRA contribution would get added back to make it taxable.

In a similar way, if you did not qualify to claim that deduction on your federal return, then you wouldn't get it deducted on your state return.