A 401(k) is an employer-sponsored retirement savings account into which the employer makes contributions that match some or all of your own contributions. When preparing your income tax return, you do not deduct contributions to your 401(k). The IRS does not consider them taxable income. Your employer subtracts them from your taxable wages when preparing your Form W-2. The IRS offers a retirement savings contribution credit. The size of the credit depends on your adjusted gross income. You figure the credit as a percentage of up to $2,000 of your contributions to your 401(k).
Married Tax Filers
If you are married, filing a joint return and your adjusted gross income (AGI) is $33,500 or less, your credit is 50 percent of up to $2,000 of your contribution. For an AGI of $33,501 to $36,000 the credit is 20 percent, and from $36,001 to $55,500 the credit is 10 percent. Above an adjusted gross income of $55,500, the credit is not available.
Single Tax Filers
If your filing status is single, and your AGI is $16,750 or less, you may take 50 percent of your contribution of up to $2,000. From $16,751 to $18,000 the credit is 20 percent, and from $18,001 to $27,750 the credit is 10 percent.You are not eligible for the credit if your AGI is above $27,750.
Head of Household
If you are filing as head of household, the IRS allows a 50 percent credit of your contribution up to $2,000 if your AGI is $25,125 or below; a 20 percent credit for an AGI between $25,126 and $27,000; and a 10 percent credit for an AGI between $27,001 and $41,625.
You may not take the credit if you are a full-time student, if another person may claim you as a dependent on an income tax return; or if you are younger than 18 in the year you make the contribution. You figure the credit by completing IRS Form 8880 and entering the calculation on Line 50 of Form 1040. You may also claim the credit on Form 1040A.