Any tax experts out there? I need some help...?

Question

This is what I want to do. I want to put more money into my 401K plan (since this isn't being taxed right now) so that my "gross" income will actually be less, therefore I won't be taxed as much. This is what a friend of mine claims he did. He grosses about $25,000 a year, but is federally taxed for only about $22,500. Consequently, instead of having a net pay of only about $18,000 a year, he has a net pay of slightly over $19,000 a year(?!?). That's what I'd like to do, but is he yanking my chain? If he's not, where could I find out (on line) how much I must put in my 401K so I'll be dropped into a lower tax rate? Thanks for any help.

Answer 1

You can do two things to lower your taxable income. Check with your Plan Administror for the rules on contributing to your 401(k). Each company pension plan can be different.

Check with the IRS (ONLY) on the rules for contributing to an IRA. Allow 30 minutes for the call. This is the most complicated tax law area and there are many rules & harsh penalties if you don't follow them.

Answer 2

In short - every dollar you put into your 401(k) will lower your tax bill.  401(k) contributions won't change the rate your income is being taxed at (your first 30K of income will always be taxed at the same rates), but they will change the amount of income that is being taxed.

There's a limit of what you can put in, however.  The IRS for 2008 allows up to 15,500 to be put in.  Your employer's plan might make that limit smaller.

You may want to contact Human Resources at your employer.

Answer 3

The other way to decrease your adjust gross income for taxes would be to open an IRA and make contributions to that...while this money is not "pre tax" it does decrease your overall income.  Just a thought of something else to consider

Answer 4

yes, your friend is right. just go to the irs website to read more about it: irs.gov