What Are Pre-Tax Deductions?

A pre-tax deduction refers to any amount that is deducted from a worker’s gross pay before any other taxes are taken from that employee’s paycheck.

This reduces an employee’s income tax by reducing their taxable income. It can also mean that an employee owes less FICA tax, which includes Medicare and Social Security.

Pre-Tax Deduction List

The government occasionally changes applicable pre-tax deductions from year to year.

Here is a non-exclusive list of some of the most common deductions:

  • Child Care Expenses
  • Commuter Benefits
  • Dental Insurance
  • Health Insurance
  • Life Insurance
  • Long-Term Disability
  • Parking Permits
  • Retirement Contributions
  • Short-Term Disability

What Are Tax-Deferred Investments?

A tax-deferred investment simply refers to investment earnings that accumulate tax-free. This can be, but isn’t limited to, capital gains, dividends, or interest.

A Quick Pre-Tax Deduction Example

There are several deductions that can be considered for pre-tax deductions. As a quick example, let’s say that an employee has a gross pay of $2,000 per pay period, along with an HSA deduction of $100 per period.

The HSA deduction would be taken out of their gross pay (2,000 – 100 = 1,900), leaving them with $1,900 of taxable income.

Taxes will then be withheld from this taxable income of $1900, resulting in less overall income tax liability.

Can You Claim Pre-Tax Deductions?

No, you cannot claim pre-tax deductions. If an employee’s work benefits are already paid for with pre-tax deductions, they are not allowed to claim them again on income tax returns.


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