What Are Examples of Pre-Tax Deductions?

Pre-tax deductions are amounts subtracted from gross income before taxes are calculated. They reduce income subject to federal, state, and sometimes local income taxes, lowering overall taxable income and tax bill. This allows certain expenses or savings to be made with untaxed dollars.

Understanding Pre-Tax Deductions

Pre-tax deductions reduce an individual’s adjusted gross income (AGI), a foundational figure for tax liability. Income set aside for pre-tax deductions is excluded from income tax calculations, lowering taxes owed. This differs from post-tax deductions, where amounts are withheld only after taxes have been applied. Many pre-tax deductions are taken directly from an employee’s paycheck, with the employer handling withholding before net pay is issued, resulting in immediate tax savings for the employee. Other pre-tax deductions may be claimed by individuals directly on their annual tax returns.

Common Employer-Sponsored Pre-Tax Deductions

Many employers offer benefit programs that allow employees to contribute pre-tax dollars, significantly reducing their taxable income. Health insurance premiums are a frequent example, where the cost of medical, dental, and vision coverage is deducted from an employee’s pay before taxes are withheld. This lowers the employee’s taxable income and can reduce both federal income tax and payroll taxes.

Contributions to employer-sponsored retirement plans, such as traditional 401(k)s, 403(b)s, and 457(b)s, are common pre-tax deductions. Funds contributed to these accounts reduce current taxable income, allowing savings to grow tax-deferred until retirement. The Internal Revenue Service (IRS) sets annual limits on pre-tax contributions to these plans.

Flexible Spending Accounts (FSAs) are another employer-sponsored pre-tax option for eligible healthcare or dependent care expenses. Contributions to FSAs are made with pre-tax dollars, meaning the money is not subject to federal income tax, Social Security tax, or Medicare tax. For 2024, the health care FSA contribution limit is $3,200, while dependent care FSAs generally allow up to $5,000 for married couples filing jointly.

Health Savings Accounts (HSAs) offer triple tax advantages: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. HSAs are paired with high-deductible health plans (HDHPs) for saving for medical costs. For 2025, HSA contribution limits are $4,300 for individuals and $8,550 for families, with an additional catch-up contribution for those aged 55 and over.

Commuter benefits also fall under pre-tax deductions, enabling employees to use pre-tax income for qualified transit passes or parking expenses related to their commute. For 2025, employees can set aside up to $325 per month for transit and an additional $325 per month for qualified parking. This deduction provides a direct saving on commuting costs by reducing the employee’s taxable income.

Other Pre-Tax Deductions

Beyond employer-sponsored programs, individuals can claim other pre-tax deductions directly on their tax returns. Contributions to a Traditional Individual Retirement Arrangement (IRA) can be tax-deductible, reducing taxable income for the year. The deductibility of these contributions depends on whether the individual or their spouse is covered by a retirement plan at work and their modified adjusted gross income (MAGI). For 2025, the maximum contribution limit for Traditional IRAs is $7,000, with an additional $1,000 catch-up contribution for those age 50 or older.

Self-employed individuals can also benefit from a significant pre-tax deduction related to their self-employment taxes. They are allowed to deduct one-half of their self-employment taxes, which cover Social Security and Medicare, from their gross income. This deduction reduces their income subject to income tax, though it does not affect the self-employment tax itself.

The student loan interest deduction allows qualified individuals to reduce their taxable income by the amount of interest paid on eligible student loans, up to a maximum of $2,500 per year. This deduction is an “above-the-line” deduction, meaning it can be claimed regardless of whether an individual itemizes deductions or takes the standard deduction. Income limitations apply, with the deduction gradually phasing out for higher earners.

Alimony payments made under divorce or separation agreements executed before 2019 were deductible by the payer as a pre-tax adjustment to income. This rule applies only to agreements finalized prior to 2019.