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Understanding Pre-Tax vs. Post-Tax Deductions. Pre-tax deductions are when your employer pulls money out of your check before the IRS gets its claws on its share of your income.
When you make contributions to a pre-tax plan such as a traditional 401(k) or 403(b) plan, that portion of your paycheck isn’t subject to income tax withholding.
If offered as a pretax benefit, employees save on their federal payroll taxes because the amount designated by the employee is deducted from their gross income, and employers save because they are not required to pay payroll taxes on such deducted amount.
Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.
In the United States tax law, an above-the-line deduction is a deduction that the Internal Revenue Service allows a taxpayer to subtract from his or her gross income in arriving at "adjusted gross income" for the taxable year. These deductions are set forth in Internal Revenue Code Section 62.
Pre-tax deductions also lower your state and federal unemployment dues. Post-tax deductions, on the other hand, are payroll deductions taken from an employee’s check after taxes have already...
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