How much can I increase the # of exemptions in my paycheck AND increase the % into my 403b plan and be ok?

Question

In other words I am looking for a tricky way to reduce my Gross Income for taxes and save as much as possible for retirement. My thought is this: If I increase my exemptions for withholding to 8 and then I increase the percentage of money put into my 403b plan to 15% I can be putting more money into retirement and giving the government less money in taxes. Will this work?

Answer 1

Yes, it will work. However, you need to do some work before you implement your plan. There will be a lot of trial and error.

The first thing that you need to do is get a copy of your 2006 tax return. This shouldn't be to hard since you just filed it.

Second, you need to see if you believe that your income or deductions will change substantially without including your 403b deduction.

Third, get a copy of your most recent pay stub. Wait for your next one if necessary.

Fourth, make a mock tax return for this year using your projected income for the year, not including your 403b deduction, and accounting for any significant changes in your income and expenses. You need to see about what your tax refund/liability will be.

Fifth, using a spreadsheet, breakdown your paycheck. You will need to review IRS Publication 15 to determine how much Federal tax is being taken out. http://www.irs.gov/pub/irs-pdf/p15.pdf Start at page 36. You also need to do the same thing for state and local income taxes. You need to figure out your Social Security taxes (7.65% of your gross paycheck). And, any other deductions that are taken out before taxes (health insurance, flexible spending account) and deductions taken out after taxes (union dues, health insurance). Yes, health insurance can be taken out either way depending on your plan. If you can change it to be taken out pre-tax, do it.

Once you have created your spreadsheet, you should be able to tell how much your new paycheck is by changing the number of exemptions for withholding and the percentage of Gross income withheld for your 403b deduction.

Next, once you have a comfortable level of how your 403b contributions and number of exemptions affect your paycheck, pick a level to see how it will affect your federal income tax return for the year. If you owe more than $1000 when you do your mock tax return, you need to adjust your figures to have more taxes taken out. You need to do this so you don't get hit with underpayment penalties.

Once you have settled on your plan, change your W-4 and increase your contributions to your 403b. When you get paid again, compare your figures to make sure that you deconstructed your paycheck correctly. Make changes where necessary.

Review your paycheck again once you have perfected your method. And do a mock tax return again to make sure that you won't get hit with underpayment penalties.

Once you have this system in place, you can easily adjust it to account for changes in your pay.

Good luck with this.

Believe it or not, I did this one day at work because I was bored out of my mind and I noticed that my 10% contribution to my retirement plan did not exactly match 10% of my gross income. So, it can be done. Its not the easiest thing to do though.

Answer 2

Putting additional money into your 403b plan will reduce your taxable income by the additional amount contributed.

Be careful about increasing your allowances on your W-4. If you are currently getting a large refund, this might not hurt you, as long as you still pay in enough through the year to cover your tax liability. If will, of course, reduce or eliminate your refund. If you don't pay in enough through the year, you will have to pay the deficit when you file your return next year, along with possible penalties for underwithholding. Changing your W-4 allowances doesn't change your tax liability, just changes the timing of when you pay it.

Answer 3

Won't work. The 403b money will come out of your check first, before taxes are applied. You still need to claim a reasonable number of exemptions, or you'll probably be in trouble come next year's tax time.

p.s. But good idea to put as much as you can into the 403b.

Answer 4

The only problem with this is that no matter what, the IRS always need that "10%" ratio for gross wages. say you made $50,000 for the year. as long as you pay $5000 in federal you won't owe to them (well, depending on filing status and what you fall under for the tax rate chart). Its best to see how much percentage wise you can put into your 403 plan as 15% is good. Just watch out for your withholdings as that could kill you tax time.

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