Before Tax Deduction

A before-tax deduction is any amount that is deducted from the gross income of an individual before the taxes are calculated. These deductions usually are to fund employee benefits such as health insurance premiums, contributions to retirement savings account or flexible spending accounts. Through deducting taxable expenses before taxes are calculated, taxpayers are able to lessen their taxable income level, thereby paying less in taxes overall. The before tax deductions are an indispensable part of financial planning that will help individuals to maximize their savings and benefits and minimize their tax burden.

Example of Before-Tax Deduction

One example of a pre-tax deduction is that of contributing to a 401(k) retirement savings plan. Thus, when the employee deducts a certain part of the salary to their 401(k) account, it will be before taxes are calculated. As an example, an employee who makes $50,000 yearly and contributes $5,000 to the 401(k) plan will only be taxed on $45,000 of their earnings. Consequently, the employee will pay lower taxes on income for the given year. Likewise, other deductions from before-tax earnings, like money given to health savings accounts (HSA) or monthly payment for health insurance, also decrease taxable income and give a financial benefit to the individual. Knowledge and application of pre-tax deduction could be of great help in achieving the goal of maximising savings and minimising tax liabilities for both individuals and households.