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My household qualifies for the maximum $2000 non-refundable Lifetime Learning federal tax credit. However, due to planned aggressive contributions to retirement accounts, my tax liability is low enough that I can only make use of about $1800 of this credit -- the remainder cannot be carried forward to another year.

I am considering shifting some of my planned IRA contributions to a Roth IRA to increase my tax liability just to the point that I can use the remainder of the credit. In a sense, Uncle Sam forgives $200 worth of income tax toward the amount put in the Roth.

At first glance, this is a very easy decision -- getting $200 of extra tax credit is free money. However, the Roth contribution (instead of the normal IRA) also increases my state tax liability to the tune of $85, because the state does not have similar tax credits as the federal ones.

I realize these are relatively small numbers, but I am having trouble deciding: is it more advantageous to defer the state tax and forego the credit, or to take the credit and pay the state tax now? I believe the answer depends somewhat on my expected tax rate during retirement, but I can't quite reason about it.

  • 2
    We can't answer for you whether this effort (however much it is) is worth $115 to you. – RonJohn Mar 7 at 5:19
  • Fair enough. For the sake of discussion, assume my time and effort are free. So far, the effort has been limited to typing up the question on StackExchange, and fiddling with the numbers in H&R Block for 10 minutes. I am academically curious. – thirtythreeforty Mar 7 at 5:22
  • A free $115 is going to outweigh any conceivable computation involving retirement age, return on investments, tax rates now and at retirement, etc. – prl Mar 7 at 5:28
  • @prl That's the way I was leaning, too – thirtythreeforty Mar 7 at 5:37

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