Tax Deductions and Credits Can You Deduct 401K Savings From Your Taxes? Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by Katharina Reekmans, EA Modified Apr 26, 2022 3 min read The contributions you make to your 401(k) plan can reduce your tax liability at the end of the year as well as your tax withholding each pay period. However, you don’t actually take a tax deduction on your income tax return for your 401(k) plan contributions. This is because you receive the benefit of a tax deduction every time you make a contribution with pre-tax dollars. Contributions to Your 401(k) The 401(k) plan contributions you elect to make come directly out of your salary. Since the contributions are made with pre-tax dollars, your employer does not include these amounts in your taxable income for the year. At the end of the year, when you receive your W-2 form that shows your earnings, you will notice that your wages subject to federal income tax are lower because of your 401(k) plan contributions. Since the wages are not counted in your taxable income to begin with, you do not take a deduction when you file your return. However, when you prepare your tax return, it’s possible to calculate how much income tax your 401(k) contributions saved you. For example, if you contribute $8,000 to your 401(k) during the year, and that amount would be taxed in the 24 percent bracket if it were included in taxable income, then your tax savings is $1,920. Increase in Your Take-Home Pay Your 401(k) plan contributions also reduce the amount of your income tax withholding. Each time you get paid, your employer withholds money for your federal income taxes based on your expected taxable income. However, if you make 401(k) plan contributions, the amount of money subject to withholding will decrease since your taxable income is less than your actual salary. The result is more money in your pocket each pay period. The Saver’s Tax Credit In addition to the tax savings available for your contributions to a 401(k), the IRS also offers the Saver’s Credit if your Adjusted Gross Income (AGI) doesn’t exceed certain maximums. This credit offers a dollar-for-dollar reduction of your income tax bill. In 2022, single taxpayers whose AGI did not exceed $20,500 ($19,750 for 2021) could receive a credit up to $1,000, and married taxpayers filing jointly with an AGI of $41,000 ($39,500 for 2021) or less could receive up to $2,000. If your AGI does not exceed IRS income thresholds, you are at least 18 years of age, you are not a full-time student, and you are not a dependent of another taxpayer, then you can decrease your tax liability with the Saver’s Credit. TurboTax also automatically gives you the Saver’s Credit if you are eligible based on your entries regarding your retirement contributions. Misconceptions About 401(k) Contributions The contributions that you make to a 401(k) plan only reduce your income taxes, not your Social Security and Medicare taxes. These two taxes only apply to your earned income, but you do not get to claim any deductions before these taxes are assessed. For example, if your gross wages for the month are $2,500 and you contribute $400 to your 401(k) plan from it, there is withholding on the full $2,500 for Social Security and Medicare even though for federal income tax purposes, there is withholding on $2,100. As you file your 2021 taxes remember you can still contribute up to $6,000 ($7,000 if you are 50 and older) to your IRA by the tax deadline and you may be able to get a tax deduction on your 2021 taxes. Just remember to tell your retirement account administrator that your contribution is for 2021 and not 2022. Don’t worry about knowing these tax laws. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions you can connect live via one-way video to a TurboTax Live tax expert with an average of 12 years experience to get your tax questions answered from the comfort of your couch. TurboTax Live tax experts are available in English and Spanish, year round and can review, sign, and file your tax return or you can fully hand your taxes over to them. All from the comfort of your home. Previous Post What’s the Difference Between a Tax Credit and a Tax… Next Post How Changes in Your Life Can Save You Money Written by Katharina Reekmans Katharina Reekmans is an Enrolled Agent and a contributor to the TurboTax Blog team. Katharina has years of experience in tax preparation and representation before the IRS. Her passions surround financial literary and tax law interpretation. She has a strong commitment to using all resources and knowledge to best serve the interest of clients. Katharina has worked as a senior tax accountant, operations manager, and controller. Katharina prides herself on unraveling tax laws so that the average person can understand them. More from Katharina Reekmans 14 responses to “Can You Deduct 401K Savings From Your Taxes?” I just signed up for my 401k this year(March) so when I file my taxes I’ll have a lot of questions. I know that turbo tax will help me. I don’t know where to ask about this. i work construction and have a union 401k. some employers are smarter than others and get it right on the first paycheck. My current employer took several weeks to figuret out just how to make the deduction in their computer system. Not many carpenters know we have a 401k in Northern California, unfortunately, the employers are not aware either. So, I’m getting my savings deducted and forwarded to my account, but they are taxing my full wage before the 401k deduction. This is costing me $150 dollars per week in take home pay! WTF! If I take a loan out for 1500 to 2000 from my 401k do i need to put that for my income tax filing ?? Or what forms would I need would I get any penalty for not putting it in my taxes when I file ? ..need help thanks You do not pay taxes on a 401(k) loan, only withdrawals. my agi for the year will be approx. 86,000 dollars. my 401k contribution is 10,000 dollars. what is my taxable income , in the 25% tax brackett. 76000 ooooooo……So close(not even close) my husband passed away and had a 401K when can I cash it in.. Hi.I quit my job in April of last year. My annual 401K contribution for 2012 is $5,000, and have an outstanding loan balance of $2,000. How would these two items affect my income tax filing for this year (2013)? Please advise. 401(k) loans do not create a taxable event, so you will not need to report that on your taxes. Your $5000 in contributions has already reduced your taxable income so all you need to do is correctly enter your W2 information. Do i have any funds in my 401k No lol Was there a change in the tax code or has the SSA always taxed “gross” wages. 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