If one is over 65 years old and the AGI is below $186k, why does TurboTax decrease taxes owed if you make a $7k Roth contribution?

You are correct, a contribution to a Roth IRA does not reduce your AGI in the tax year you make it. Roth contributions are funded with after-tax dollars, meaning there's no deduction at the time of your deposit.

 

In TurboTax revisit Traditional IRA and Roth IRA  contributions.  Make sure you checked Roth IRA and not Traditional IRA.

 

You do not need to include contributions to a Roth IRA in your return because there is no deduction benefit for contributing to Roth. 

While Roth contributions are not reported on your tax return, it is a good idea to enter them the in the IRA contribution section anyway because TurboTax will:

• track the basis of your contributions for you year-to-year. [This becomes important when you start making withdrawals--to track how much of the distribution is taxable.]
• alert you if your MAGI exceeds the Roth contribution limit and are subject to a penalty.
• alert you if you have insufficient earned compensation to contribute.

 

To enter contributions to a Roth IRA in TurboTax, please follow these steps:

1. Click on Federal Taxes > Deductions & Credits  
2. Scroll down to the Retirement and Investments section and click on the Start/Revisit box next to Traditional and Roth IRA Contributions. 
3. On the Traditional IRA and Roth IRA screen, mark the box for Roth IRA and click Continue. [Screenshot #2]
4. On the Roth IRA Contributions screen, click the Yes box. 
5. Click the appropriate box on Is This a Repayment of a Retirement Distribution?
6. On the Enter Your Roth IRA Contributions screen, enter the amount of your contribution and click Continue.