Tax Management: 401k or W-4

[Jluke]

Hopefully this makes sense...

I currently itemize my deductions for tax purposes, however I am approaching the point where I would be better off taking the standard deduction (not in 2015 and probably not in 2016).

I currently claim Married 1 on the W-4 (wife and kid) but I do owe on taxes at end of year. 25% tax bracket.

This year I increased my 401k to minimize the tax at the end of year - figuring this is best b/c I am giving myself money rather than paying more to the IRS.

So two issues,

1) Is it better to manage taxes through the 401k vs the W-4?

2) Am I in good shape or bad shape if when I itemize I don't meet the standard deduction? Knowing what goes into the itemizing, I think I'll be in good shape b/c I'll have very little mortgage interest ($1975 in 2015).

Just curious on others point of view.

[phantom]

Changing your 401k contribution changes what you owe in taxes, and changing what you claim on your W4 changes what gets withheld. Ideally, you would optimize both. Contributing to your 401k to minimize what you owe is good. Changing your W4 so that the proper amount of taxes get paid during the year and you neither owe nor get back a lot of money is also good. You can always change the number that you claim on your W4 or simply specify that you want additional money to be withheld.

I don't think whether you itemize or not says anything about whether you are in good or bad shape. (I'm assuming you'll do whatever saves you more money, and you're asking about what itemizing says about your financial situation. Correct me if I'm wrong.) In my household there are three big deductions that make itemizing make sense: charitable contributions, property taxes, and mortgage interest payments. As long as we continue to have at least 2/3 of those expenses, itemizing will continue to be the better deal for us. I guess having a paid for house and no mortgage interest would mean we were in better financial shape. But, contributing less to charity would probably imply we were in worse financial shape. I'm going to count the property taxes as a neutral. I guess they mean we can afford to live in a nice house, but they also mean we live in a part of the country where lots of things get paid for by property taxes.

[MonkeyMama]

1 - It doesn't really matter. The technical answer is that it's better to manage taxes through W-4. Because technically if you contribute to a 401k then you would have less taxes taken out of your check. You might find that you still owe the same as always.

That said, the tax code is extraordinarily complicated, and small 401k contributions can lower your taxes dramatically in some situations. I'd say that I probably manage my own taxes significantly through retirement contributions. Because the slightly lower taxable income will boost our deductions and credits to the point of a significant tax drop. (In turn, I barely withhold any taxes from my paycheck. But we'd owe a lot if we didn't manage the retirement contributions).

In your situation, you may have to adjust your W-4 if you don't want to owe.

2 - I agree with Phantom. Living in a high-tax state, itemizing often means nothing more than you made a lot of money (so you itemize because you also paid a lot of state taxes). Even when our mortgage is paid off we will still itemize. Our big deduction is medical/health insurance. Property taxes are a close second. (We personally have very low state income taxes, like about $500 for this year). I am sure mortgage interest was our biggest deduction a decade ago, but it's quickly falling down the list with current interest rates.

[feh]

1) Is it better to manage taxes through the 401k vs the W-4?

2) Am I in good shape or bad shape if when I itemize I don't meet the standard deduction? Knowing what goes into the itemizing, I think I'll be in good shape b/c I'll have very little mortgage interest ($1975 in 2015).

1) they are unrelated issues; you should save as much in your 401K as you can, regardless of your tax situation

2) they are unrelated issues

[autoxer]

1) Is it better to manage taxes through the 401k vs the W-4?

2) Am I in good shape or bad shape if when I itemize I don't meet the standard deduction? Knowing what goes into the itemizing, I think I'll be in good shape b/c I'll have very little mortgage interest ($1975 in 2015).

I see the 401k as a good opportunity to reduce your total tax owed while the W-4 is how you adjust the amount withheld from each paycheck. I aim to withhold most of my tax due, so that I only owe a little bit in april. That makes more sense to me, then to withhold too much and get a big tax return. I also aim to reduce my tax bill by contributing as much as possible to the 401k.

Regarding the standard deduction, it doesn't really reflect good or bad shape. Although it is good that you are minimizing mortgage interest. I feel like I am in good shape, even though I intend to itemize for the foreseeable future.