What is a pre-tax deduction?
A pre-tax deduction is money taken out of your pay before tax is worked out. Because the tax is charged on less pay, your taxes go down, and your take-home pay falls by less than the amount you put in. The three most common are:
- A traditional 401(k): savings for retirement, often with a match from your employer.
- Health insurance: your share of the premium for a plan through work.
- An HSA: a health savings account, for people with a high-deductible health plan.
Each one lowers a different set of taxes. A 401(k) lowers income tax only. Health insurance and HSA money taken through your employer’s plan also lowers Social Security and Medicare, a further 7.65%. Other pre-tax benefits, such as a flexible spending account (FSA) for health or child care costs, or commuter benefits, work in a similar way, but the calculator does not include them.
How much does a 401(k) contribution really cost?
Take a single filer in Texas on $60,000 a year, paid every two weeks, putting 5% of pay into a 401(k). That is $3,000 a year, or $115.38 a paycheck. Federal income tax falls by $360.00, because the $3,000 would have been taxed at 12%. So take-home pay falls by only $2,640.00, not $3,000: each dollar saved costs about 88 cents. Social Security and Medicare stay the same.
In a state with an income tax the saving is bigger, because most states also let the 401(k) money skip state tax. Any employer match is extra money on top, and it is not taxed until you take it out.
What are the 401(k) limits for 2026?
- Your own contributions: up to $24,500.
- From age 50: another $8,000 as a catch-up contribution.
- At ages 60 to 63: a bigger catch-up, $11,250, instead.
Your plan stops taking contributions when you reach the limit. If you enter more than the limit in the calculator, it tells you.
How does an HSA lower my taxes?
Money paid into an HSA through payroll skips federal income tax, Social Security and Medicare, and it comes out tax-free when spent on medical costs. Putting $100 a paycheck into an HSA, every two weeks, is $2,600 a year. On the same $60,000 salary in Texas, federal income tax falls by $312.00 and Social Security and Medicare by $198.90. Take-home pay falls by $2,089.10: each dollar costs about 80 cents.
What are the HSA limits for 2026?
- Self-only health cover: up to $4,400.
- Family cover: up to $8,750.
- From age 55: another $1,000.
Unlike a 401(k), the HSA limit includes what your employer puts in. You can only pay into an HSA while you are covered by a high-deductible health plan.
Which states tax pre-tax deductions?
Most states follow the federal rules. Three of the states on this site do not:
- Pennsylvania taxes your 401(k) contributions. On the same $60,000 with 5% in a 401(k), Pennsylvania tax stays at $1,884.00, the same as with no 401(k) ($1,884.00). Health insurance and HSA money still skips Pennsylvania tax.
- California taxes HSA contributions. With $2,600 in an HSA, California income tax stays at $1,573.08; only California’s SDI falls, from $780.00 to $746.20.
- New Jersey taxes both health insurance premiums and HSA money taken out before tax. Your 401(k) is still free of New Jersey tax.
What is not a pre-tax deduction?
A Roth 401(k) comes out after tax, so it does not lower your tax now. Neither do union dues, wage garnishments or after-tax insurance. They all reduce your paycheck, but not your taxes. To see how each pre-tax deduction changes your own paycheck, enter it in the paycheck calculator, and see how it fits with the federal tax brackets.