Free Money! How to Make Pretax Deductions Work for You

×

Most people looking to save money in their household budgets take one of two routes: Either they cut back on discretionary purchases, or they use coupons and discounts to make those discretionary expenditures cost less. Neither of those techniques, though, touches the part of the budget dedicated to necessities -- the expenses that absolutely have to be paid. But what if there was a way to slash spending on non-negotiable costs like child care, dental work and transportation?

Well, there is: Most employers allow workers to deduct money for basic expenses before they pay taxes on them. Some of these pretax withdrawals -- like deposits into 401(K) accounts and health insurance programs -- are well known. However, there are a lot of less-discussed withholding options that you can use to cut your tax bill. For example, you may be able to deduct money for child care, transportation expenses, parking permits, dental care, eye care and even tuition. You can even pay for long-term care insurance that will provide for you in case of disability.

The immediate value of these deductions is obvious: By pre-allocating funds to those basic necessities, you can avoid paying taxes on money that you were going to spend anyway. Even better, pretax deductions can also cut the state, federal and FICA taxes that you pay on the rest of your money. Depending upon the amount that you set aside, it's possible that you could shift yourself into a lower tax bracket, greatly reducing your tax burden.

That's exactly how it worked for one person to whom I talked about this topic. Her decision to set aside $160 per paycheck in pretax deductions slid her down into a lower tax bracket. Ultimately, the lower rate, combined with the money that she saved on the deductions themselves, meant that the actual reduction in her bi-weekly paycheck was only $70. Given that she was already committed to spending the $160 that she withheld, this translated into an effective savings of $90 every two weeks, or $2,340 per year.

Obviously, the potential savings vary greatly, depending upon the amount of money that you deduct and the size of your salary. But with thousands of dollars potentially at stake, it can't hurt to talk to someone in your company's human resources office about what pretax deductions might be right for you.

Increase your money and finance knowledge from home

How to Buy a Car

How to get the best deal and buy a car with confidence.

View Course »

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Add a Comment

*0 / 3000 Character Maximum

20 Comments

Filter by:
duey35

Hey the article had all the liberals at (free money). They are already writing and Emailing in to get what they can.

April 14 2011 at 11:56 AM Report abuse rate up rate down Reply
crazy ray

But what about all us retired people without employers? Why can't we have a plan to set aside pretax money? Is it possible for us to start one?

April 14 2011 at 8:55 AM Report abuse +1 rate up rate down Reply
3 replies to crazy ray's comment
therule72

Famous quotes in history: Nany Pooloosie; "Elections shouldn't matter as much as they do."... and an old favorite, "Ya gotta pass the ObummaCare bill to see what's in it." Then there was Josef Stalin who said, "It doesn't matter who casts the votes; what matters is who COUNTS the votes". Hummm, Pooloosie and old Joe have a lot in common.

April 13 2011 at 5:38 PM Report abuse rate up rate down Reply
therule72

Using the income tax laws, anyone with half a brain can take advantage of provisions that allow you to make other taxpayers subsidize or pay entirely for a wide variety of "goodies". Examples: home improvements, boats, cars, golf carts, real estate, college, "business expenses", baby sitting services, on and on!!

Thanx suckers... for your generosity!!

April 13 2011 at 5:22 PM Report abuse +1 rate up rate down Reply
1 reply to therule72's comment
Jamie Samans

It'd be nice if more people had the slightest idea what capitalism meant or how it worked.

May 22 2014 at 4:11 PM Report abuse rate up rate down Reply
taxguy527

THIS “SPENDING CUT’ IS POCKET CHANGE, IN VIEW OF THE MASSIVE INCREASES OBAMA & THE DEMS HAVE PUT IN. GO BACK TO 2008 LEVEL OF SPENDING, NOW. OBAMA'S RHETORIC....HIS PRETENDING TO WANT TO BE FISCALLY RESPONSIBLE IS NOTHING BUT A FRAUD. HE AND HIS PALS HAVE PERPETRATED THE MOST FINANCIALLY DAMAGING EXPLOSION OF SPENDING EVER KNOWN IN THE HISTORY OF THIS COUNTRY....THAT WILL BE HIS LEGACY, THE DESTRUCTION OF THE FINANCIAL BASE OF THIS NATION THRU HUGE GOVT SPENDING & FINANCING IT ALL WITH DEBT....MOST OF THE SPENDING GOING TO HIS VOTER BASE (a huge percentage of which don’t even pay any Federal or State income taxes) TO BUY THEIR VOTES & SUPPORT. INTENTIONAL ECONOMIC DECEPTION AND MISMANAGEMENT IS TREASONOUS.

April 13 2011 at 2:15 AM Report abuse rate up rate down Reply
PAMELA S

We as Americans need to organize and recall every Republican across America.

They have put us through Hell, it is time to boot the Republicans actually to Hell.

ALTHOUGH, JUST RECALLING THEM WOULD HELP THE UNITED STATES TREMENDOUSLY.

THANK YOU

PAMELA S

April 12 2011 at 9:24 PM Report abuse -7 rate up rate down Reply
2 replies to PAMELA S's comment
Rhonda

you have the wrong side goofey

April 13 2011 at 4:47 AM Report abuse +2 rate up rate down Reply
Robert Burke

why don't you explain what the republicans have done wrong I don't think you can answer this question intelligently but try anyway.

April 13 2011 at 11:08 AM Report abuse +1 rate up rate down Reply
Pappy

Airlines, oil companies, and farmers dodge another bullet. What happens if there is no bad weather or severe storms? I've never been compensated for any weather related issues.

April 12 2011 at 6:07 PM Report abuse rate up rate down Reply
jbmcjbm

Alot of this debt, is held by American's, certain amounts are owed to the social security trust which the government has been borrowing for years. Everyone better start paying more attention to the problems which we're all responable for creating. If we default on this debt the whole world is going to feel it.

April 12 2011 at 8:32 AM Report abuse +5 rate up rate down Reply
1 reply to jbmcjbm's comment
Debra

If we default, America's credit rating will fall. No one will loan money, and the stock markets around the world will fail, along with ours. It will be worse than the Great Depression.

Now, the Republicans want to get rid of Medicare for all, and Medicaid for the poor. My husband has been paying Social Security for 49 years, and Medicare since 1972. He will, well maybe, retire on Dec. 31, 2011. When his Social Security begins, he will have worked 50 years and now the Republicans are going to tell US that he will NOT get Medicare and his Social Security will be cut.

I don't think so!

Republicans blame the Democrats for everything. Now, I do believe that the Democrats should have let the Bush Tax Cuts to the richest 2% run out. But blame the Democrats for the mess this country is in? REALLY?

The Republicans have controlled the House and Senate for all but 9 1/2 years since Jimmy Carter became President. We have only had 3 Democratic Presidents including Carter, Clinton, and Obama. That is only 14 years since 1976.

Republicans are supposed to stand for a small government, but they have run this country and spent monies like they wanted. George W. Bush ran a deficit on the Iraq and Afghanistan Wars, and the Republicans upped the debt ceiling 6 times, at least.

Now they say only the Middle Class and the Poor will pay for the horrible mistakes they, and the Democrats have made with our country. In the past, wealthy Americans created jobs. Now, only small business' create jobs, but the wealthy pay less percentage wise than most.

Raise the top 2% of wealthy people back to before George W. Bush gave them welfare. They can afford the 2 or 3 percent raise on their taxes. Do away with BIG farm and oil subsidies. I'm not talking family farms; I'm talking FACTORY farms owned by the wealthiest people. Raise the ceiling on Social Security withheld from income. If you make $1 million a year, you pay Social Security tax on $1 million etc.

This country just can't cut taxes and help for the poor; we must raise money also. God help all of us if the government does not come together for the good of THIS NATION and not only for the good of THEIR PARTY!

April 12 2011 at 4:41 PM Report abuse -4 rate up rate down Reply
scottee

we need a fairtax.org....to stop the loopholes, the deductions, the filing and the social engineering by congress! please!

find this essay online and read it all....545 People by Charley Reese.

and then tell me if you think either party in Washington cares about the people.
so what do we do? be victims? or vote out every incumbent, every election every time until they become fiscally responsible? it's our choice. we can take their power and money away. and we need to if we don't want to go down the tubes!

April 12 2011 at 8:19 AM Report abuse +1 rate up rate down Reply
1 reply to scottee's comment
jbmcjbm

Your suggestions will not help solve the problem!

April 12 2011 at 8:28 AM Report abuse -2 rate up rate down Reply