How Traditional IRA contributions actually impact my AGI for tax filing?

But wait, if their income is above the phaseout limit, would they get ANY deduction for the traditional IRA? I'm in a similar situation and was planning to contribute to a traditional IRA this year. Also, wouldn't a $9000 reduction at the 24% bracket be around $2160 in tax savings? That's way more than the $550 they mentioned. Something still seems off.

You're right that if their income is completely above the phaseout limit, they wouldn't get any deduction for the traditional IRA. At $140k AGI for a single filer with a workplace retirement plan, they would be fully phased out of the traditional IRA deduction. The $9,000 reduction at 24% would indeed be around $2,160 in tax savings if it were fully deductible. However, what's likely happening is that the tax software is correctly calculating that the $6,000 IRA contribution isn't deductible at their income level, so they're only getting the benefit of the $3,000 capital loss. A $3,000 reduction at 24% would be about $720 in tax savings, which is close to the $550 difference they're seeing.

How exactly does this work? Does it just analyze what you've already filed or can you use it before filing to figure out the best approach? My tax situation sounds similar to the OP's.

Sounds interesting but I'm skeptical. How is this different from what tax software already tells you? TurboTax already explains deduction phaseouts and gives recommendations.

It works by analyzing either your completed tax forms or your financial documents before filing. You can upload your W-2s, investment statements, and other documents, and it will identify opportunities that most tax software misses. Unlike regular tax software that just calculates, this actually explains the "why" behind each calculation. The difference from standard tax software is that it specifically looks for missed opportunities and explains complex concepts in plain language. Most tax software will calculate correctly but doesn't proactively identify better strategies. For example, it caught that I could do a backdoor Roth conversion which my regular tax software never mentioned as an option.

How does this actually work? Do they just call the IRS for you? Seems like something I could do myself without paying a service.

Yeah right. The IRS wait times are like 2+ hours minimum. There's no way they got you through in 15 minutes unless you got extremely lucky. Sounds like a scam to me.

They use an automated system that navigates the IRS phone tree and waits on hold for you. When they reach an agent, you get a call connecting you. So you don't waste hours listening to hold music or getting disconnected. It's definitely not a scam. The 15 minutes was my wait time after they had already navigated the system and secured a place in line. The total process from when I signed up to speaking with an agent was around 45 minutes, but I was able to do other things instead of being stuck on the phone. With regular calling, I kept getting disconnected after 45+ minutes of waiting, which was incredibly frustrating.

Thanks for the detailed explanation! That makes sense now - I didn't realize the Traditional IRA deduction phases out at my income level since I have a workplace retirement plan. I checked and my tax software did correctly mark it as non-deductible, which explains why I only saw the benefit from the capital losses. Would you recommend I do a Backdoor Roth IRA instead for this year? I've heard about it but wasn't sure if it applied to my situation.

Yes, the Backdoor Roth IRA would be perfect for your situation. Since you can't deduct traditional IRA contributions anyway, you might as well get the tax-free growth benefit of a Roth. The process involves making a non-deductible traditional IRA contribution (which you've already done) and then converting it to a Roth IRA. If you don't have any other traditional IRA assets, this is very clean tax-wise. Just be sure to file Form 8606 properly to document the non-deductible contribution, and then report the conversion on next year's taxes. The conversion itself isn't taxable if you convert soon after contributing (before significant gains occur).

Yes! That feature saved me last year. I discovered that shifting some of my retirement savings from traditional to Roth actually made more sense for my tax situation. The immediate tax hit was minimal but the long-term benefits were huge according to the calculator.

That's good to know! I need to use those tools more effectively. I think a lot of people (including me) just assume traditional retirement contributions always lower current taxes, without realizing the phaseout limitations. Did you find the what-if calculators accurate compared to your actual filing results?

The what-if calculators in most tax software are pretty accurate for basic scenarios, but they sometimes miss the nuanced stuff like IRA deduction phaseouts. I've found they're great for comparing traditional vs Roth contributions when you're clearly above or below income limits, but they can be misleading in those gray areas where phaseouts apply. For someone like the OP with high income and workplace retirement plans, I'd recommend running the scenarios but also double-checking the results against IRS Publication 590-A to make sure the software is applying the phaseout rules correctly. Sometimes the calculators assume full deductibility when you're actually in a phaseout range.