TransWikia.com

Do Traditional 401(k), FSA, and HSA contributions reduce your tax liability even if you don't itemize?

Personal Finance & Money Asked on September 5, 2021

I hope people will indulge me what may be a rather dumb question. If you take the standard deduction/don’t itemize, does contributing to a Traditional 401(k), Health Savings Account, or flex medical spending account still reduce your tax liability? How about a Traditional IRA? Does it make a difference whether it was withheld from your paycheck or if you made an extra contribution above and beyond the normal amount that’s withheld?

3 Answers

Yes, all of the deductions you mentioned are outside of the itemized deductions, so participation reduces your taxes even if you elect to take the standard deduction.

Items that are deducted from your paycheck by your employer, such as 401(k) contributions, payroll HSA contributions, or FSA deductions do not show up on your tax return at all. Your employer subtracts these amounts from your total income and puts a reduced amount on the W-2 that you receive that reports your income. As a result, they are automatically deducted without ever appearing on your Form 1040 tax return.

There are other types of deductions that do show up on your tax return, but are still outside of the itemized deduction. These are sometimes called above-the-line deductions, because they are deducted before the adjusted gross income total, and before the standard/itemized deduction is subtracted. Examples of this are IRA contributions, HSA contributions that are separate from payroll deduction, and the student loan interest deduction. These are all deductions that are available to you even if you choose the standard deduction.

The only deductions that you forgo if you choose the standard deduction are the ones that you see on Schedule A. Those would be the Medical Expense deduction, the State and Local Tax Deduction, Home Mortgage Interest, Charitable Giving, Casualty and Theft Losses, and the miscellaneous deductions listed in the Schedule A, Line 16 instructions.

Correct answer by Ben Miller - Remember Monica on September 5, 2021

Yes to all 4. Assuming you contribute through your employer's payroll, Traditional 401(k), Health Savings Account (HSA), and Flexible Spending Account (FSA) contributions are deducted from federal wages on your W-2. Traditional IRA is an above-the-line deduction, which means you don't have to itemize to benefit. In practice, it works out the same as a payroll deduction.

HSA contributions done outside payroll would become an above-the-line deduction as well. However, one difference is you don't avoid FICA (Social Security + Medicare) taxes that way, while you do as a payroll deduction. I don't believe you can do FSA contributions outside of payroll, and certainly not 401(k) contributions unless it's a self-employed plan, so that part of the question isn't relevant to them.

Answered by Craig W on September 5, 2021

You can check this yourself on your pay stub.

You have various items on your stub that are deducted from your gross pay. The result is your net pay. You will find that some items reduce your taxable income. Some companies delineate the two by making separate lists, or putting a code or an asterisk next to the items that reduce your taxable income. They frequently include a line telling you what your taxable income was for that check.

You should see that the following items decrease your taxable income: health, dental, and vision insurance premiums; your HSA contribution; Flexible spending contributions; and traditional 401(k) contributions. Some companies also allow you to pay for certain commuting expenses via pre-tax funds.

When the tax year is done, you will receive a W-2 form. You will notice that the item in box one isn't your gross income for the year. It is your taxable income for the year, plus one small optional item. If your company provides a life insurance policy, and the value of the policy exceeds $50K, the amount they pay for the excess value is considered taxable income.

Of course the company will not know about items that don't come out of your paycheck that do reduce your federal or state taxes that are also available even if you don't itemize. That includes HSA contributions not via your paycheck, traditional IRA contributions, and 529 contributions.

Answered by mhoran_psprep on September 5, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP