When evaluating a job offer, salary isn’t the only factor to consider. Pre-tax benefits can have a big impact on your take-home pay and overall financial health. You can save money for specific expenses before taxes, lowering your taxable income and the amount of income tax you owe to increase your spendable earnings.
If you’re comparing job offers, benefits enrollment or annual tax planning, a financial advisor can help you evaluate how pre-tax and post-tax benefits play a role in your financial situation.
What Are Pre-Tax Benefits and Deductions?
Employee benefits that are deducted from your paycheck before federal income taxes, Social Security taxes and Medicare taxes are calculated. These paycheck deductions lower your taxable income, and help employees save money to plan for the future.
However, pre-tax benefits may also reduce the wages reported on your W-2. This can impact how lenders assess your income for loans or mortgages. You’ll generally pay taxes on this money when you withdraw it, such as in the case of retirement accounts.
Employers often offer a selection of pre-tax options as part of their total compensation package, allowing employees to customize their benefits based on personal priorities and lifestyle. Here are four common pre-tax benefit options. One of the most popular pre-tax benefits is the employer-sponsored retirement plan, such as a 401(k) or 403(b). Contributions to these plans grow tax-deferred. You won’t pay taxes on the money until you withdraw it. These plans often include employer matching contributions, making them even more valuable. Employers usually deduct health insurance premiums from your paycheck on a pre-tax basis. This reduces the amount of income subject to federal income tax and FICA (Social Security and Medicare) taxes. The IRS requires pre-tax health insurance deductions follow a Section 125 “cafeteria” plan, which must meet certain requirements. If you waive coverage or choose a plan outside your employer’s offerings, you may lose the pre-tax advantage. An HSA is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). You contribute pre-tax dollars which grow tax-free until you withdraw them, again tax-free, for qualified medical expenses. Unlike flexible spending accounts (FSAs), HSAs do not have a “use-it-or-lose-it” rule. The funds roll over from year to year and can even be invested. HSAs offer a rare triple tax benefit: pre-tax contributions, tax-free growth and tax-free withdrawals for medical costs. Commuter benefits allow employees to pay for transportation and parking expenses using pre-tax income. These programs, administered through payroll deductions, cover eligible transit costs such as subway passes, bus fare, commuter rail and qualified parking at or near work. While pre-tax benefits offer immediate tax savings, post-tax benefits are deducted after your income has already been taxed. Some post-tax benefits are essential for income replacement or long-term financial security. Three examples of post-tax benefits include: You can pay for life insurance and disability insurance with either pre-tax or post-tax deductions. It’s a good idea to check with your plan administrator to ensure you understand the tax implications. Pre-tax benefits can make a big difference in your take-home pay, long-term savings and financial flexibility. By reducing your taxable income, they offer an immediate tax advantage while helping you cover essential expenses like healthcare, retirement and transportation. Photo credit: ©iStock.com/tonefotografia, ©iStock.com/Ridofranz, ©iStock.com/ciricvelibor Read the full article hereExamples of Pre-Tax Benefits and Deductions
Pre-Tax Retirement Plans
Health Insurance Plans
Health Savings Accounts (HSAs)
Commuter Benefits
Pre-Tax vs Post-Tax Benefits
Bottom Line
Tax Planning Tips
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