I am trying to reduce my taxable income by contributing to a SEP as well as a Roth or Trad IRA but I am getting capped at a $200 reduction. Why? Because I'm head of house

[stephanieannlangenfeld]

I am getting a message that I am head of household and have contributed to an IRA and so the max credit is $200. My issue is less with my tax payment and more with needing to keep my taxable income lower.

[dmertz · Accepted solution]

You appear to be confusing the Retirement Savings Contributions Credit with the reduction in AGI that you get for a deductible retirement contribution.  Two different things.

The Retirement Savings Contribution Credit, a tax credit calculated on Form 8880, is 10%, 20% or 50% of the first $2,000 of your retirement contributions, depending on AGI and filing status.  It appears that you are getting a tax credit of 10% of $2,000.  For Head of Household, the AGI range for a 10% credit is $37,501 to $57,375.

Separately, your ordinary traditional IRA contributions and SEP contributions reduce AGI, reducing taxable income.  Roth IRA contributions are not deductible, so they do not reduce AGI.  Note that the sum of all of these types of retirement contributions and the deductible portion of self-employment tax is not permitted to exceed your net profit form self-employment.  If you exceed that, you have an excess contribution that is subject to penalty.  Examine the Keogh, SEP and SIMPLE Contribution Worksheet in TurboTax to see the calculation of the deductible amount.  You SEP contribution is not permitted to exceed the deductible amount.  Also examine Form 5329 to see if any of your your ordinary traditional IRA or Roth IRA contributions are excess contributions.