What are the Different Types of Pre-Tax Deductions?

K. Kinsella

Pre-tax deductions are expenses taxpayers can deduct from their taxable income in order to lower their overall tax burden. Laws specifying which items taxpayers can write off vary from country to country, but typically pre-tax deductions include education expenses, retirement account contributions, and health care costs. Many countries have tiered systems for income tax, and the ability to deduct expenses enables many taxpayers to fall into lower tax brackets.

Contributions to a retirement account, such as a 401(k), are pre-tax deductions.
Contributions to a retirement account, such as a 401(k), are pre-tax deductions.

Governments offer taxpayers the ability to make pre-tax deductions to encourage people to fund necessary expenses, such as healthcare. In the United States, people must pay for their own private health insurance, although many employers share the cost. The federal government allows taxpayers to write-off health insurance premiums as well as contributions made to flexible spending accounts, from which consumers draw funds to cover the cost of prescriptions and doctor visit co-pays.

Individuals and businesses are usually able to deduct contributions made to retirement accounts.
Individuals and businesses are usually able to deduct contributions made to retirement accounts.

Many nations allow both consumers and business entities to deduct contributions made to retirement accounts. Businesses often save money by funding employee’s retirement accounts because of the pre-tax deductions. In the United States, many companies allow employees to enroll in 401(k) retirement accounts, which are partially funded by both the employer and the employee. Contributions are not only made on a pre-tax basis, but funds invested grow tax deferred, so people only pay federal income tax when they begin to make account withdrawals during their retirement years. The same tax benefits are afforded to taxpayers who establish Individual Retirement Accounts (IRA), which often involve no employer contributions.

Home owners are often able to use premiums paid for homeowners' insurance and charges related to mortgage interest as tax write-offs. Investors who own multiple rental properties can typically only write off taxes and insurance costs related to their primary home. Business tax laws do allow some investors to write off business expenses, and in some countries interest payments on investment property loans are classified as business expenses. Other common business related deductions utilized by self-employed people include vehicle maintenance costs, advertising expenses, and charges related to entertaining clients.

Pre-tax deductions are not available to everyone. High earners are often unable to claim deductions for retirement plan contributions and health care costs, and in the United States many high earners have to pay the Alternative Minimum Tax (AMT), which is designed to make people with above average income pay federal taxes. Most countries have some kind of income restrictions on pre-tax deductions.

Pre-tax dedcutions are not available to everyone.
Pre-tax dedcutions are not available to everyone.

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Discussion Comments


@MrsWinslow - That's a good point. Another kind of deduction that you can take even if you do not itemize is that if you are a teacher, you can deduct classroom supplies. I know all about that one!

People who are married take for granted pre-tax medical and other benefits (like life insurance) for themselves and their spouses. But did you know that any benefits for a domestic partner are considered taxable income by the IRS?

Imagine two couples, one a married couple and the other a lesbian couple, who both have one partner working at the same company. Both pay two hundred dollars a month for medical coverage for the non-working partner, and the company pays the other four hundred. For the lesbian couple, that subsidy amounts to $4800 extra a year that they have to pay taxes on. And some people wonder why gay people care so much about being able to get married...


What not everyone realizes is that there are actually two kinds of allowable tax deductions - ones that are available only if you itemize your deductions and ones that are available as an addition to the standard deduction.

For it to be worthwhile to itemize your deductions, you almost have to own your home, so that you are paying a lot of money in tax-deductible mortgage interest. Once you have that, you can deduct other things, like charitable contributions.

But there are a few special deductions that are available even if you don't itemize. For instance, student loan interest can be deducted by anyone, as can moving expenses for a new job.

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