Is My 401(k) Contribution Tax Deductible?

by Michael Keenan ; Updated September 11, 2015

Corporations often create employee retirement plans, called 401k plans, to offer their workers in addition to their salary. These plans provide tax benefits to encourage people to save for their years of retirement. Understanding how 401k plan contributions affect your income taxes can help you better decide how much you want to contribute and can help you avoid misrepresenting your contributions on your tax return.

Misconceptions

Your 401k plan contributions do not get reported on your federal income taxes as a deduction. The contributions are already taken into consideration by your employer when they send you your W-2 form at the end of the year. In box 1 of your W-2 form will be your total income subject to income taxes. This amount is what you report on your income taxes and it does not include your 401k plan contributions. For example, if your annual salary is $30,000 and you contributed $3,000 to your 401k plan, your W-2 would only show $27,000 of taxable income.

Effects

The tax-savings effects of your 401k plan contributions depends on your income tax rate. The federal government uses a progressive income tax scale, meaning that the more income you have, the higher the income tax rate that you pay. Since the 401k contributions reduce your taxable income, the amount they will reduce your taxes varies based on the percentage of your income that you pay in taxes. For example, if you fall in the 33 percent income tax rate, a contribution of $3,000 would save you $990.

Corporate Contributions

Depending on where you work, your employer may contribute to your 401k plan on your behalf. You are not permitted to claim these contributions as a deduction on your own income taxes. However, these contributions receive the same tax-sheltered benefits that your contributions do and, like your contributions, will be subject to income taxes when you withdraw the money at retirement.

Tax Credits

The IRS also offers low-income taxpayers the ability to claim a tax credit for their 401k plan contributions. A credit differs from a tax deduction because it directly reduce your tax liability. For this credit, you can claim between 10 and 50 percent of your contribution as a credit depending on your filing status and your adjusted gross income. In order to claim this credit, you must complete form 8880 and file your taxes using either form 1040 or form 1040A.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."