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.