Question

Why would Turbo Tax show a $7000 IRA contribution reducing taxes more than a $7000 401(k) contribution?

Forum|Forum|3 years ago
March 19, 2023
1 reply
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Why would Turbo Tax show a $7000 IRA contribution reducing taxes more than a $7000 401(k) contribution? The $7000 IRA contribution showed a $1590 tax savings and the $7000 401(k) contribution showed a $1266 tax savings.

J

JulieS

Yes, an IRA contribution can result in a higher tax savings because it reduces just your adjusted gross income (AGI), while a 401(K) contribution reduces both your earned income and your AGI.

A reduced earned income can also reduce your Earned Income Credit and it can impact the calculations for Additional Child Tax Credit and the Self-Employed Health Insurance Deduction.

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D

dmertz

Employee

The answer provided by @JulieS assumes that your 401(k) contribution is one reported with code D in box 12 of a W-2 and the amount in box 1 is correspondingly reduced. However, you indicate that you are using TurboTax Home & Business, suggesting that you are self-employed and the 401(k) contribution would be a self-employed retirement deduction which does not also reduce your taxable income on Schedule 1 line 3. The deduction for a traditional IRA contribution and a deduction for a contribution to an individual 401(k) would each be reported on Schedule 1 with neither changing the amount of income from self-employment being reported on Schedule 1. So reason for the difference in tax savings is still a bit of a mystery.

Do you or your spouse have compensation other than the net earnings from self-employment? If so, it's possible the a $7,000 401(k) contribution exceeds what you are eligible to contribute and TurboTax is limiting the self-employed retirement deduction to the lower amount permitted. The higher traditional IRA contribution would be supported by both sources of compensation while the 401(k) contribution would be supported only by your self-employment compensation.

I suggest comparing the two sample tax returns side-by-side to see where the difference arises.

D

dd152Author

Thanks! Yes, my wife has only Self-Employment Income and I have W2 income. We both share passive income, but that is at a loss for 2022. I am covered by a 401(k) plan and she is not, however I was considering whether to make an IRA contribution for her or have her start a Solo(K) plan.

Your response makes sense that the 401(k) might only be reducing her self-employment income. I will check out the sample tax return for both as you suggested.