Making a SEP-IRA contribution makes my taxes due increase?

[1955chevman]

My spouse is self-employed and the only employee in the business. The allowed maximum SEP-IRA contribution is approximately $3000. I arrived at this number two different ways: 1) IRS Pub. 560 worksheet, and 2) by allowing Turbo Tax to “maximize” the SEP-IRA contribution.  Both methods yield the same amount, so I feel pretty sure it is correct. The problem is when I enter this value in to the Business Income & Expenses page in TurboTax the Fed & State taxes increase?!  In other words, if I leave the cell blank or enter $0 we owe a smaller amount of taxes. Is this a bug in the software or am I missing something?

[dmertz]

There are a number of reasons that this could be a correct indication; it's unlikely that it's due to a software bug.  Since you appear to be using the CD/download version of TurboTax, switch to forms mode and examine your Form 1040 with and without the SEP contribution entered to see how the self-employed retirement deduction that appear on line 28 and corresponding reduction AGI is affecting your tax return overall.  Do the same for your state tax return.  You can also print and compare forms side-by-side.

[1955chevman]

Good advice. If I enter any SEP-IRA amount it is considered a "workplace retirement plan" then the Traditional IRA amount allowed of $6500 disappears from the 1040.  That is the difference. I'm all set, thank you.

[tentoten]

I'm having the same issue - what did you ultimately do to fix it?

[1955chevman]

In my case, any SEP-IRA amount is considered a "workplace retirement plan" then the Traditional IRA amount allowed of $6500 disappears from the 1040 when the AGI is too high.  That is the difference.  I confirmed it doing it both ways (with/without SEP contribution) and compared both 1040s in the "forms view".

[dmertz · Accepted solution]

Answered in the comments.  In this particular case, due to filing status and AGI, a separate traditional IRA contribution becomes nondeductible when the SEP-IRA contribution is entered indicating that the individual is covered by a workplace retirement plan.