For example, a 30 percent matching credit is the equivalent of an income tax deduction for someone with a 23 percent tax rate. In a traditional 401(k), one doesn’t pay taxes when making the contribution, but nonetheless must pay taxes upon withdrawing the money at retirement. With a 15% income tax rate, the tax-advantaged net tax rate at the end of the 30 years would be, of course 15%. If the income tax rate were 20%, the effective tax rate would be 29%. Here’s another example: there have been proposals to switch from a “pure” tax deduction for charitable contributions to a tax credit instead.

Source: Forbes August 25, 2020 03:56 UTC