Pre-Tax deductions?

M

mike_mck2

Joined
May 19, 2005
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301
How do pre-tax deductions work?

Yes, you do save some tax on each paycheck, but at the end of the year, you still earned the money and you pay taxes on it, pre-tax deduction or not.
Is that correct?

So a pre-tax option is only good for giving you a bit more on each paycheck, but less at tax time?

TIA
 
a pre tax deduction like a cafeterial plan (125k) or a 401k take a with drawl out of your paycheck BEFORE your taxes are calculated. This gives you two advantages.
1. Your taxes on your paycheck are calculated at a lower income level thus you pay less taxes per paycheck
2. the monies withdrawn from your paycheck are not taxed.

if this money goes into a 401k then you will be taxed at the time you withdraw this money. Usually when you are retired.

125k or cafeterial plan monies are never taxed. These monies are considered tax deductible income such as health insurance premiums, day care expenses, medical expenses etc. a 125 k is just easier to save for a rainy day.


Ren
 
Ren the devils trailboss said:
a pre tax deduction like a cafeterial plan (125k) or a 401k take a with drawl out of your paycheck BEFORE your taxes are calculated. This gives you two advantages.
1. Your taxes on your paycheck are calculated at a lower income level thus you pay less taxes per paycheck
2. the monies withdrawn from your paycheck are not taxed.

if this money goes into a 401k then you will be taxed at the time you withdraw this money. Usually when you are retired.

125k or cafeterial plan monies are never taxed. These monies are considered tax deductible income such as health insurance premiums, day care expenses, medical expenses etc. a 125 k is just easier to save for a rainy day.


Ren
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There is also a 3rd advantage. You are investing a greater amount of money pretaxed then post, thus your return will be greater upon a successful investment of the funds. The idea later is that most people will upon retirement will potentially be in a lower tax bracket so you would then face less tax liability upon withdrawl of your money. :thumbup:
 
Let's do a very simplified example.

Let's say you earn $100,000/year (this number will keep the math simple).

Let's say that puts you in the 35% tax bracket.

Ignoring all other deductions so forth, your tax is $35,000. You get to keep $65,000. Let's say you wisely put $15,000 of that into an investment for your retirement. You now have $50,000 to blow on knives.

Instead, let's say you put 15% of your income into a 401K plan pre-tax, that's $15,000. Your taxible income is now $85,000. Let's say that this drops you down into the 30% tax bracket (again, this is very simplified example). You now owe $25,500 in taxes and get to keep $59,500... and you've already put $15,000 into your retirement account, so you have $59,500 for knives!
 
And, yes, it will reduce the amount of your refund at years end.

Ideally, you shouldn't even get a refund, or pay any additional tax at the end of the year, provided that you have your deductions and witholdings figured correctly.

Why let the IRS earn interest on money you shouldn't have paid them in the first place?
 
CODE 3 said:
And, yes, it will reduce the amount of your refund at years end.

Ideally, you shouldn't even get a refund, or pay any additional tax at the end of the year, provided that you have your deductions and witholdings figured correctly.

Why let the IRS earn interest on money you shouldn't have paid them in the first place?
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I let the feds withhold from my paychecks even though I haven't had a year where I've made enough to owe federal taxes- it works for me because there's no way I can spend the money that they've taken until I get it at the end of the year- sort of a no-touch savings account, lol. Works for me.
 
madcap_magician said:
I let the feds withhold from my paychecks even though I haven't had a year where I've made enough to owe federal taxes- it works for me because there's no way I can spend the money that they've taken until I get it at the end of the year- sort of a no-touch savings account, lol. Works for me.
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Even better, you could have your paycheck direct deposited, and have your bank divert a certain amount to a savings account. You'll earn interest, and have access to the money when you really need it. My wife and I both do this, and when the savings reaches a certain amount, we automatically buy a 6 month CD, which earns even more interest.

Frankly, I can't see giving the IRS the opportunity to earn interest on your money when you could be earning that interest yourself. I hear where you are coming from, as I used to do the same thing many years ago. I still receive a refund, but it is typically less than $500 depending on income.
 
The best outcome you can have is to end up owing the government a small amount, not so much as to be penalized. What this means is that you borrowed money from the government with no fees and no interest. :thumbup: When you get a refund, it means that you loaned the government money with no interest. :thumbdn:

I always laugh at people who celebrate getting a big tax refund.
 
Mike, the answer to your question is no...you will not be taxed on the amount you have removed from your check Pre-tax at the end of the year.

Your money taken pre-tax is generally used for employee benefits..ie: health care, maybe a company sponsored 401k, Simple Ira...etc.

Any money you contribute to these devices will come out of your pay in whole dollars (before being taxed)...the concept is for your benfit.

That means you reduce your paycheck by said dollars which then reduces the amount taken by taxes on the remainder.

I hope this helps....if you still need help let me know.


Big John
 
Gollnick said:
I always laugh at people who celebrate getting a big tax refund.
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Yeah, it's (financially) stupid to let the government earn interest on my money. However, you forget that there are other factors to consider. If I have the money taken out of my paycheck and put into a savings account, my wife will say, "Look, we have money to spend on [some stupid] household item." But, when I get my tax refund, I get to say, "Look, I got some of the taxes that were taken out of my paycheck back -- now I have money to spend at Blade!"
 
dsvirsky said:
Yeah, it's (financially) stupid to let the government earn interest on my money. However, you forget that there are other factors to consider. If I have the money taken out of my paycheck and put into a savings account, my wife will say, "Look, we have money to spend on [some stupid] household item." But, when I get my tax refund, I get to say, "Look, I got some of the taxes that were taken out of my paycheck back -- now I have money to spend at Blade!"
Click to expand...


It is nice how Blade comes right about that time, eh?
 
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