Deferring your income pre-tax to certain areas is an effective way to invest in programs you need now or in the future. Because the money used for your selections isn’t counted in your taxable income, you’ll get benefits you need and pay less tax on the income you take home. Most pre-tax savings are offered through employers, and benefit plans vary depending on what your company decides to offer. In most cases, you can only change your enrollment to pre-tax programs during annual open enrollment periods, so you’ll want to review your company’s offerings and plan for savings before the period begins.
Step 1
Contribute to pre-tax retirement accounts. Your contributions to many retirement plans sponsored by your employer are deducted from your pay before taxes are calculated. Examples of pre-tax plans include 401(k) accounts, 403(b) and 457 plans. When you make pre-tax contributions to these plans, you’re saving for retirement, and saving money on your tax bill at the same time.
Step 2
Purchase health insurance through employer-sponsored group plans. In most cases, premiums you pay for group medical insurance are subtracted from your gross wages pre-tax. Employers often pay part of your premium as well. The result is lower insurance costs and a lower tax bill.
Step 3
Participate in employer flexible spending accounts. If your employer offers this benefit, you can put aside pre-tax dollars for expenses such as medical co-pays, prescriptions and health supplies, as well as up to $5,000 annually for child care costs.
Step 4
Save pre-tax dollars with other fringe benefits. Your employer may offer other types of fringe benefits, including education assistance, retirement planning services, transportation reimbursement and life insurance. If your employer offers these types of programs, ask if there’s a tax benefit for participating. Money withdrawn from your pay for these items is usually exempt from income tax and/or Social Security and Medicare tax withholding if the program is structured correctly.
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Writer Bio
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.