What Pre-tax Deductions are Not Subject to Federal Tax?

A key benefit of pretax deductions is that they give employees a tax break. Your employer deducts the benefit from your wages before it computes taxes. While federal law exempts pretax deductions from certain taxes, not all deductions are subject to the same taxes.

Deduction Types

Pretax benefits include qualified group-term life insurance; medical, dental, vision, accident and disability insurance; adoption assistance; dependent care reimbursement accounts; health savings accounts; qualified 401(k) plans; group legal services coverage; and transportation benefits for parking and public transportation fares.

Federal Income Tax

Pretax deductions are generally exempt from federal income tax even if they are not excluded from other federal taxes. An exception may apply to flexible spending accounts and health savings accounts. The former is an employer-sponsored plan that lets you set aside pretax money to pay for child or elder daycare expenses. No matter where you work, the latter is owned by you and lets you pay for future medical expenses that your insurance does not cover. Based on your filing status, the Internal Revenue Service caps the amount that you may contribute to these plans on a pretax basis. The IRS also limits the amounts you may contribute toward pretax transportation expenses and adoption assistance. Expenses paid within the limits are exempt from federal income tax; amounts that exceed the limits are taxable.

Federal Insurance Contributions Act

The same pretax contribution limits for federal income tax purposes go for Social Security and Medicare, or FICA, taxes. Most pretax deductions are exempt from FICA tax, but some exceptions apply. You must pay FICA tax on group-term life insurance coverage that exceeds $50,000 and on contributions toward an adoption assistance program, which lets you pay for expenses connected to adopting a child with pretax money. You also pay FICA tax on qualified 401(k) contributions.

Federal Unemployment Tax

Federal unemployment tax is an employer-paid tax. Your employer pays the tax at a percentage of a specific amount of wages paid to each employee for the year. Your employer pays federal unemployment tax on contributions for adoption assistance, 401(k) and group-term life insurance over $50,000. It saves money on all other pretax deductions that are excluded from federal unemployment tax.

Considerations

Pretax deductions that are exempt from federal taxes do not show up as taxable wages on your annual W-2. However, deductions paid with after-tax money -- such as for taxable benefits or amounts that exceeded federal limits -- are included on your W-2 as taxable wages. You may claim specific benefits paid with after-tax money as a tax credit or deduction on your federal tax return.

About the Author

Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.

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