We'll be looking at the 2021 tax return form 1040. So if you had a different version 1040EZ, 1040 SR, 1040NR or something like that yours might be slightly different, but we're going to be working with a 2021 Form 1040 for these articles. If viewing this in the future compare the description of the line items to the current year forms.
On page one, we're going to be looking at income as the starting point on the tax return, so look on line 1. That is wages you earn from working for someone else and get a Form W2 at year end.
Wages are typically gross income. When we talk about taxable income, there's gross income and net income. If we are talking about wages, gross income is typically before taxes are withheld. Later as we get into other types of income such as business income, gross income is usually income before deducting allowable expenses.
It will be helpful to have your W2 for this next section. Look at Boxes 1, 3 and 5 of your W-2. Your gross wages are typically what goes in Box 1. If you look closely, you might see that Box 1, 3 and 5 while they report income all might report different amounts of income.
And that could be because you have a 401 K type plan and so when you hear people talk about how putting money into a 401k type plan lowers your taxes owed, basically it's because it causes Box 1 to be smaller than Box 3 and 5 and Box 1 is what goes to your tax return as wages income.
Because it's smaller, that smaller income gets recorded on your tax return on Line 1, which we'll find out later on is one key part of your Taxable Income. So the lower income on Box 1 results in lower taxable income and therefore lower total taxes owed.
So one thing you can do to lower your total tax owed in any given year is if you have access to a pre tax deduction plan like a 401k, 403B, 457 type or others consider maximizing the pretax benefit of this kind of plan which can lower your current year taxable income.
If you are a business owner or self-employed and not lowering your tax bill by contributing to your own retirement plan let’s have a call to discuss your options to get a tax deduction for contributing to your own plan.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.