Can I Claim My 401(k) Contrubutions on My Taxes?

by Mark Kennan, studioD

Your employer can offer you the chance to defer part of your pay into a 401(k) retirement plan sponsored by the company. If you have been sacrificing money from each paycheck to defer into your 401(k) plan during the year, knowing how it impacts your taxes may reassure you that the benefits outweigh the drawbacks.

No Double Deduction

You cannot claim your 401(k) contributions as a deduction on your income tax return like you could an IRA contribution because your employer does not include it as income subject to income taxes when it prepares your W-2. In your W-2, your wages, tips and other compensation in Box 1 will differ from your Social Security wages in Box 3 and your Medicare wages in Box 5, because though your employer withholds FICA taxes on your 401(k) contributions, your employer does not count them as taxable income. If the IRS permitted you to take a deduction, you would get a double deduction.

Still Get Tax Break

Do not worry that because you cannot claim a deduction, you do not get a deduction benefit on your taxes for your 401(k) contribution. The amount that you report as income has already been reduced by your 401(k) contribution. To illustrate, if your annual wages total $43,000 and you deferred $3,000 into your 401(k) plan, your wages in Box 1 of your Form W-2 would show $40,000, so on your taxes you would report "$40,000" of income, not "$43,000."

Retirement Savings Credit

The Retirement Savings Credit encourages people with lower incomes to save for retirement by offering tax credits for those who qualify. The IRS sets low income limits that vary by filing status. You also do not qualify if you are under 18 years old or of you were enrolled as a full-time student for any part of at least five calendar months of the year. For example, if you were in graduate school and your classes started on January 20 and you graduated on May 2, even if you take no other classes, you do not qualify.

Claiming the Retirement Savings Credit

To claim the Retirement Savings Credit, you must complete Form 8880 and use either Form 1040 or Form 1040A to file your income tax return. If you are married and both spouses made retirement contributions, you can use one Form 8880 for both of you. To complete the form, you need to know your total retirement plan contributions and your adjusted gross income (AGI). Your AGI is found on line 38 of Form 1040 or line 22 of Form 1040A. The maximum credit equal $1,000 per person as of the time of publication


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."