Can you deduct your 401K from your taxes?
The contributions to a 401K can reduce your tax liability at the end of the year and can also reduce your tax withholding for each pay period. However, one would not tax a tax deduction on your tax return for your 401(k) plan because one receives the benefits of a tax deduction very time one makes a contribution to the plan with pre-tax dollars.
Contributions to your 401(k)
The 401(k) plan contributions that an individual will make come directly out of his or her salary. Therefore, since the contributions are made with pre-tax dollars, your employer does not include these amounts in your taxable income for the year. However, it is possible to calculate how much your contributions that you made to your 401(k) saved you in in taxes. For example, if you contribute $10,000 to your 401(k) during the year, and your tax break is 25%, your tax savings are $2,500.
Increase in the size of your take-home pay.
Your 401(k) contributions also reduce the amount of your tax withholding. Every time you get paid your employer withholds money so that your federal income taxes can be paid. The calculated withholding amounts are based on your expected taxable income.
However, a percentage of the income is going into the 401(k) plan, then the amount of money that is subject to withholding will decrease since your taxable income is less than your actual salary. The result of this is that your take-home pay is higher than if you had not made the contributions because the amount of money subject to withholding is lower if you have made the contributions than if you had not made them.
The Saver’s Tax Credit
The IRS also offers the Saver’s Credit if you Adjusted Gross Income (AGI) does not exceed certain maximums. The credit offers a dollar for dollar reduction of your income tax bill. In 2018, a married taxpayer filing jointly with an AGI of over $38,500 or less can receive a credit up to $2,000 and a single taxpayer who’s Adjusted Gross Income does not exceed $19,250 can receive a credit up to $1,000.
Additional Information about your 401(k) Contributions
The contributions that you make to your 401(k) plan will reduce your income taxes but not your Social Security and Medicare taxes. This is because these two taxes apply to your earned income, but there is no deduction before these taxes are assessed. For example, if your gross wages per month are $5,000 and you contribute $1,000 to your 401(k) plan. There is still a withholding tax on the remaining $4,000 that is earned for Social Security and Medicare even though for federal income tax purposes, there is a still a withholding on $4,000. If you are contribution money to a traditional IRA however, your contribution for a particular year can be a tax deduction.