Lowering my tax bracket.

Taxable income. BTW, the above are for single filers.

Your marginal tax rate is 15%. Try this in your program: add an IRA deduction of $1000. Your federal tax will decrease by exactly $150.

There is also an effect on state taxes.

Yes, the tax benefit is negligible.

The above sort of analysis is useful for this kind of situation: If you're in the 15% tax bracket, long term capital gains rate is 0% for

2010. So you might want to take enough long term capital gains to get your taxable income to $33,950. If you have slightly more long term capital gains, I think only the excess above $33,950 is taxed at 15%.

Other answer was right on. I'd only add - for 2009 taxes, you can deduct just enough IRA to hit the

15%/25% line dead on, and don't deduct the rest, you can deposit the rest (up to the $5000 IRA max ($600 if you were 50 in 2009)) to a Roth. This is one of the times that a mix of Traditional and Roth can benefit. Saving you the 25%, but not 'wasting' a 15% deduction. Make sense?

Joe

In some states. Pennsylvania, for instance, allows no deduction for IRA contributions.

Right, each state is different, and some may have different IRA limits. For example the federal level may allow you to contribute and deduct 8k if the company you work for screwed up (i.e. went bankrupt), but the states probably don't allow an 8k deduction. And California had lower limits for the deduction in the good old days, so I hear, but now they conform to federal -- though I'm not sure if for the additional 3k if your company goes into bankruptcy.

And does Pennsylvania tax IRA withdrawals?

Interesting for any state that doesn't allow an IRA tax deduction. Do they have a state-only 8606 equivalent so they don't tax the money originally deposited that was state post-tax, and just tax growth? Joe

No.

The answer for NJ is "yes".

Incidentally, the NJ tax law and situation, which may be the same as others, is even complicateder.

1. If someone lived in NJ when they contributed to a Fed-deductible IRA and is living in another state when they withdraw from it, the new state taxes them based on their IRA rules. So, if they allow the same deduction as the Feds, they will tax the entire withdrawal, even though state income tax had previously been paid on a part of it (and the tax credit for another state's tax doesn't apply).
2. Someone who moves into NJ from a state that allowed the same deduction as the Feds gets a mini-windfall because the taxable amount of the withdrawal is based on the NJ rules, so they don't need to pay NJ tax on that part of the withdrawal that's their own contribution, even though they didn't pay state income tax on that contribution.

Cool. So retirees can consider Pennsylvania (in addition to Florida and Texas)! From the other post, NJ is a little bit generous too, but it's quite a nightmare to track your contributions to IRA over the years.

MA does not allow a deduction for tradition IRA contribution (even when the feds do). MA also does not allow deductions for any contribution made by or on behalf of the business owner in any qualified plan where the business owner is not a W-2 employee of the business).

It is on the taxpayer to track all these non-MA-deductible contributions.

When distributions are taken, MA deems you to be taking the contributions out first. Thus none of these distributions are taxable on the MA return until all the contributions are recovered. (So unlike the federal 8606 it is NOT pro-rata).

-- Rich Carreiro snipped-for-privacy@rlcarr.com