If you participate in a company-sponsored retirement plan or purchase health insurance through your employer, you probably have seen one or more voluntary deductions from your paycheck. The choices vary by company, depending on the types of benefits your employer offers. Some deductions can be changed in the middle of the year while others are locked in for the entire year. Certain types of voluntary deductions are made with pre-tax money, which lowers your taxable income. You will see each deduction listed on your pay stub. The exact format varies depending on the payroll company that issues your checks. Consult an accountant or licensed tax preparation firm if you need help reporting any voluntary deductions on your tax return.
Retirement Plan Contributions
Contributions you make to a 401(k), SIMPLE IRA, 403(b) or other employer-sponsored retirement plan will be made as a pre-tax payroll deduction. Most plans provide open enrollment periods during the year in which you can change the amount of your contribution or end it altogether. You can choose to contribute a flat dollar amount each pay period or a percentage of your gross pay. Depending on the provisions of your plan, the employer might also match all or part of your contribution. Tax-free retirement plan contributions are subject to annual IRS limits. The limits vary based on your age and the type of plan your employer offers. Contact your accountant or visit the IRS website for more information.
Premiums for employer-sponsored health insurance plans are usually paid through payroll deductions. You might have to pay a portion of your premium and an additional amount for each dependent. Your employer might also offer life insurance, disability, accidental death and dismemberment, dental and vision. Group policies are usually less expensive than purchasing your own individual policy. If the company has a Section 125 plan, also known as a "cafeteria" benefits plan, you can pay your premiums with pre-tax money.
Flexible Spending Accounts
Flexible spending accounts are another way for you to save money on taxes by using pre-tax money to pay your expenses. You must designate the amount to be deferred into your account at the beginning of the year. As you incur qualifying medical expenses such as over-the-counter medications or contact lens supplies, you can request reimbursement from the plan administrator. A change in your family or work status must occur before you can change or stop your deduction in the middle of the year. You must use the money in your account before the end of the year or it is forfeited.
Loans and Advances
Loan payments made back into to a 401(k) or other retirement plan are pre-tax deductions because the funds you borrowed were also funded with pre-tax deductions. If you voluntarily assign your wages to a private creditor, you will make these payments with after-tax deductions. You may also be required to pay administrative costs to process your payment.