Post-tax deductions
Common examples include Roth IRA retirement plans, disability insurance, union dues, donations to charity and wage garnishments. Employees can decline to participate in all post-tax deductions but wage garnishments.
Form W-2 shows taxable wages reported after pre-tax deductions. Pre-tax deductions include employer-provided health insurance plans, dental insurance, life insurance, disability insurance, and 401(k) contributions.
All taxpayers with earned income, whether from a day job or side hustle, qualify to deduct a specific amount from their income before paying any taxes. For example, a single taxpayer earning US$40,000 a year and who had no children in the 2024 tax year would qualify for a standard deduction of $14,600.
Pre-tax money means income you receive that you have not paid income tax on. It doesn't necessarily mean you will never have to pay tax on those dollars. For example, you contribute pre-tax dollars to your 401(k) plan, but you will eventually pay tax on those dollars when you withdraw the money from the plan.
Simply put, pre-tax means that premiums are deducted before taxes are calculated and deducted; after-tax means that premiums are deducted after taxes is calculated and deducted.
Pre-tax deductions are subtracted from the employee's gross pay before taxes are withheld. After-tax deductions are subtracted from the employee's net pay after taxes are withheld.
A pre-tax deduction is any money taken from an employee's gross pay before taxes are withheld from their paycheck. These deductions reduce the employee's taxable income, meaning they'll owe less income tax.
The standard deduction in 2024 is $14,600 for individuals, $29,200 for joint filers, and $21,900 for heads of households. The IRS adjusts the standard deduction each year for inflation. The amount of your standard deduction is based on your filing status, age, and other criteria.
To calculate the after-tax income, simply subtract total taxes from the gross income. For example, let's assume an individual makes an annual salary of $50,000 and is taxed at a rate of 12%. It would result in taxes of $6,000 per year. Therefore, this individual's after-tax income would be $44,000.
Your box 1 wages figure on your W2 will already contain the adjustment for your pre-tax amounts. The pre-tax amounts themselves are then generally reported in box 12 (or sometimes box 14).
Generally, health insurance plans that an employer deducts from an employee's gross pay are pre-tax plans. But, that's not always the case. While shopping for health benefits plans for your employees, you may consider either pre-tax or post-tax health insurance options.
However, not all post-tax deductions appear on this form. Many, such as union dues and life insurance premiums, don't have designated reporting boxes on the W-2 form. These deductions appear on pay stubs rather than the W-2, which can lead to confusion.
Try to estimate which one best reflects your present and future tax situation. If you expect your tax bracket to increase, the Roth contribution option will clearly make more financial sense. If you predict the reverse, pretax contributions will benefit you more in the long run.
So Social Security payments made by the employer are considered "before-tax income" (and hence, not taxable). So the value of the "before-tax income" received by the beneficiary (i.e., the employer's contribution) is potentially taxable.
If the amount on Line 12a of last year's Form 1040 ends with a number other than 0, you itemized. If this amount ends with 0, it's likely you took the Standard Deduction. If this amount ends with 00 or 50, you probably took the Standard Deduction.
For example, if your annual earnings amounted to $100,000 and you contributed $23,500 to a pretax retirement account, your taxable income for that year decreases to $76,500.
But unlike the employer-sponsored coverage that most Americans have during their working years, Medicare premiums are not typically paid with pre-tax dollars. Some Medicare beneficiaries, however, have the opportunity to deduct their Medicare premiums when they file their taxes.
Health and dental insurance are both popular before-tax benefits; life and accident insurance, even if a voluntary benefit, can be paid with pre-tax income, giving tax advantages to the company and their workers.
Examples of post-tax contributions in U.S. retirement accounts include Roth 401(k) and Roth 403(b) plans. Contributions are made with post-tax dollars and do not provide an immediate reduction in taxable income. However, qualified withdrawals from Roth accounts in retirement are tax-free. Some insurance premiums.
The Federal income deduction is deducted from the net amount of taxable pay. A TSP contribution is pre-tax; that is, it is excluded from taxable pay. However, the Federal income tax deduction takes priority over the TSP deduction in the order of precedence.
For health insurance, the decision between pre-tax and post-tax contributions depends on your financial strategy and healthcare needs. Pre-tax health insurance contributions lower your taxable income, which means you could pay less in income tax throughout the year.