What is Pre-Tax Deduction?

What is Pre-Tax Deduction?

Tax deduction matters are always a change for working class people. Everyone tries to reduce the tax burden to the barest minimum yet without compromising standard set by IRS office.

What does Pre-Tax Deduction mean?

The pre-tax deduction is a legitimate deduction that lowers employees’ taxable wages within a stipulated period. It is applicable to the gross income of the individual.

The pre-tax deduction is a deduction made on gross wage before arriving at the tax withholding. It reduces taxes payable on social security, medicare taxes. The following are common pre-taxes that you may need to consider.

What all Pre-Tax Deductions to consider?

Savings for retirement

Any savings for retirement is deducted from the gross before final calculation for tax. The idea is, the amount paid into this savings reduces taxable income by the same amount. Your final payable tax reduces by the amount you pay into your retirement savings.

Employer baring the retirement savings

It is common that employers may decide to match employees’ retirement savings to the last penny. This can be done to a certain amount of money. Therefore, employees’ will not have to pay taxes on the employer matches that are done to his retirement savings.

Group insurance

Health insurance plans that cover short and long-term disability conditions, life insurance, dental, and vision care insurance, are insurance plans that are deducted pre-tax, which will reduce the final tax payable. It is better to consult CPA firms to have the comprehensive list of medical, insurance, retirement plan and other deductions that may help to reduce the final payable taxes.

Special savings account

Most companies offer a flexible savings account, which has the maximum annual amount that employees’ can contribute on yearly basis. They are for IRS accepted health matters like Medicare, childcare and adult care expenses. Companies HR do have the comprehensive list of eligible expenses.

Every penny contributed to pre-tax deduction reduces the final amount payable to federal, state, Medicare and social security. Start to have more savings on your wage by engaging in more pre-tax deductions to boost your savings.

Although there is the limit amount you can commit to a pre-tax deduction based on your annual income, it is not a bad idea to get in touch with a tax advisor for more clarifications on this matter.

There are variations in pre-tax, depending on the state you are resident, so you will need to consult your company HR as well to know how best you can benefit from pre-tax deductions.

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