How Deducting a Traditional IRA Contribution Works
If you are eligible for a tax-deductible IRA contribution, the amount you contribute is deducted from your taxable income. This results in a lower tax bill.
However, IRA contributions are deductions, not credits, so it is not a one-for-one reduction. For example, if a taxpayer is in the 30% (thirty percent) tax bracket, and they contribute $2,000 to their IRA, that will reduce the amount of taxes they pay by $600. ($2,000 x 30% = $600)
So, if your accountant or bookkeeper tells you that you have to send the IRS an $800 when you file your tax return, you can erase the amount you owe by making a big enough deductible IRA contribution.
In this case, if we again assume a 30% tax bracket, a $2,667 contribution would eliminate the amount owed for last year’s taxes by way of the $800 deduction.