I must have made the wrong assumption about IRA deductions.
I contributed roughly $1800 to an employee 401k program at work but I also contributed the max $5500 to an IRA I have on the side. I see that the $5500 reduced my AGI but noticed that didn't impact EITC. I thought the EITC would be based on on my AGI.
During the tax return I was asked if I wanted to make the IRA contribution deductible or non-deductible. It seemed either way my refund wasn't going to increase and I chose deductible in case I apply for a program (like student loan forgiveness) that may base their assistance on my AGI.
Since the IRA contribution was post tax should I have put it as non deductible or does it matter?
Sorry if that sounds confusing but I was first mistaken on how it would affect my EITC then I was confused and unsure if I should choose deductible or non deductible for the IRA contribution. I guess I'm wondering if I had chosen non deductible would that have helped me in some way since I don't see any immediate benefit from chosen deductible.
I am NOT a financial advisor, but I will attempt to give you a few things to consider. First, with regard to EITC, you need to know that the EITC calculations consider BOTH "AGI" and "Earned Income". EITC is calculated using both AGI and Earned Income and you get the lower benefit. When you contribute via your 401k, you lower both the AGI and the Earned Income. However, note that you must have Earned Income in order to be able to contribute to an IRA. Therefore, while the IRA contribution can lower your AGI (due to the IRA adjustment), the IRA contribution does not affect the Earned Income number. I suspect that is the reason you see no affect on EITC. You can consider increasing the 401k contribution to lower both Earned Income and AGI in the future.
Now with regard to choosing deductible or non-deductible for IRA, please be careful. Your comments make me nervous. In any case, please keep good records with accurate information and your Form 8606s. Most of people, whom I know, usually choose deductible contributions for Traditional IRAs in order to take advantage of lowering their out-of-pocket costs for the contributions. If you make a deductible contributions, then that should lower your AGI and it should lower your tax burden. Likewise, the people, whom I know, will typically use a Roth IRA when they can afford to fund their IRA savings with after-tax money. (There are additional advantages for Roth IRAs that are beyond the scope of this short response. Please study the benefits of the Roth IRA.) If you are not seeing any benefit from making a deductible IRA contribution, then please investigate to understand what is happening. If you make non-deductible contributions, that can lower future taxes for withdrawals (again good records and Form 8606 are essential), but please look into the Roth IRA as an alternative if that is your situation.
Also, be aware that there are limits for Traditional IRA contributions when you have a retirement plan at work. See: https://www.irs.gov/retirement-plans/plan-participant-employee/2018-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
Thank you for the reply. I sorta figured out the first part with the EITC and that's good to know for the future.
On the second part I think I messed up. My contributions towards my (traditional) IRA were post taxed money. I was confused when doing my taxes and I believe the Turbo Tax recommended making it deductible so I did however it had no affect on my tax return. I'm guessing this was the wrong decision. I do keep all forms from each tax return but since I made this deductible, if I understand correctly, I will now be taxed on money I've already paid tax on. That is really disappointing considering I maxed my traditional IRA contribution this year at $5500.
I shouldn't run into this again as I've decided not to contribute to the IRA anymore and instead increase my 401k contribution to help out with the EITC. With my income and two children that is a huge tax break and I would be stupid not to try to maximize it.
I would consider converting the IRA but since I'm not going to contribute (unless an unexpected windfall comes my way) then I suppose it doesn't matter at this point.
Thank you for replying. If I've got any of this wrong please let me know. I appreciate you taking your personal time to try to sort me out here.
You can recharacterize the traditional IRA contributions to Roth so you won’t be taxed on it again.
https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions