Hello
Doing my 2021 return and already pissed off because I forgot to do the IRS tax estimator in 2021 (bad year)
So I did the estimator for 2022 and its claiming I need to increase my withholding $80.00 per paycheck.
Instead of giving money to the IRS, I haven’t maxed out my 401K yet. What is the ratio of increase to tax reduction?
I want to increase my contribution to then reduce my AGI which will reduce the need for $80 increase
Thanks
JTS
No one can tell you the answer to your question without running the numbers. You can do that yourself. Run the IRS estimator with differing amounts of 401K contributions and see what the results are.
Ira
So I did the estimator for 2022 and its claiming I need to increase my withholding $80.00 per paycheck.
Instead of giving money to the IRS, I haven’t maxed out my 401K yet. What is the ratio of increase to tax reduction?
I want to increase my contribution to then reduce my AGI which will reduce the need for $80 increase
As Ira points out, you need to run the numbers yourself, as you haven’t provided enough information, like what bracket you’re in. As a general rule of thumb, if you are in the 22% bracket, each $100 of 401(k) pre-tax contribution will reduce your taxes by $22. So to cover $80/paycheck, you’d need to increase your contribution amount by $364 per paycheck ($80/0.22 = $364). For the 24% bracket, you’d have to increase your contribution amount by $333 per paycheck. If you’re in a different bracket, you can divide $80 by the bracket you’re in. If increasing your 401(k) contribution moves you down in tax brackets, use the lower bracket to figure the contribution increase needed.
That said, changing 401(k) contribution amounts can adjust other things in your tax return, so it’s probably best to run the estimator yourself with the different levels of 401(k) contributions, like Ira suggested.
AJ
I want to increase my contribution to then reduce my AGI which will reduce the need for $80 increase
To be a bit more clear on what Ira and AJ are dancing around:
If you increase your 401k contribution, that will decrease your federal (and most state’s) tax withholding. That is because the 401k contribution reduces the taxable portion of your wages. And reducing the taxable wages reduces the income taxes withheld.
So even if you max out your 401k contribution, you will probably still need most of that additional $80 extra tax withholding for each paycheck.
The reason for that additional withholding is almost certainly your income from things OTHER than wages - interest, dividends, capital gains, side business - something like that. If you don’t change that income, you won’t change the need for additional paycheck withholding.
–Peter
Greatly appreciate all the comments and understand that 401K increase is not the panacea out of my problem. My problem is lack of our oversight when my wife’s W-4 (2020 format) was submitted incorrectly by her work (putting her in as married filing single not filing joint) and thus not taking enough out.
Add on this that our child credits shift as two of our kids are not under 17
JTS
My problem is lack of our oversight when my wife’s W-4 (2020 format) was submitted incorrectly by her work (putting her in as married filing single not filing joint) and thus not taking enough out.
That makes no sense. Married but withholding as single withholds taxes based on single rates, which are half of the MFJ rates. She should have had more taxes withheld, rather than less.
AJ