After-Tax Deduction
Decoding After-Tax Deductions: Understanding the Post-Tax Landscape
What Is After-Tax Deduction?
An after-tax deduction, also referred to as a post-tax deduction, signifies an amount subtracted from a taxpayer’s income after the deduction of various taxes, including federal, state, and local income taxes, as well as Social Security and Medicare contributions. These deductions can vary by state and may encompass:
- Roth 401(k) contributions
- Employer-sponsored pension plans
- 529 college savings plans
- Union dues
- Disability and specific life insurance policies
- Charitable contributions
Calculating After-Tax Deduction: A Simplified Example
Consider Caroline’s scenario as an illustrative example:
- Gross wages: $1,000.00
- FICA taxes (7.65%): $76.50
- Additional taxes: $75.00
- Roth 401(k) after-tax deduction (4%): $40.00
Calculations:
- Multiply gross pay by FICA percentage: $1,000.00 X 0.0765 = $76.50
- Multiply gross pay by deduction percentage: $1,000.00 X 0.04 = $40.00
- Subtract FICA from gross pay: $1,000.00 – $76.50 = $923.50
- Subtract additional taxes: $923.50 – $75.00 = $848.50
- Subtract deduction amount: $848.50 – $40.00 = $808.50
Distinguishing Pre-tax and After-Tax Deductions
The key disparity between pre-tax and after-tax deductions lies in when they are withheld from a paycheck. Pre-tax deductions are subtracted from the employee’s gross pay before tax withholding, reducing reportable W-2 income and lowering taxes. Examples include traditional 401(k)s, HSAs, FSAs, and health insurance.
On the other hand, after-tax deductions are subtracted from the employee’s net pay after taxes are withheld. While this increases take-home pay, it also raises the tax liability. Examples encompass disability insurance, Roth 401(k), union dues, and some healthcare benefits.
Examples of After-Tax Deductions: A Comprehensive List
After-tax deductions extend beyond traditional contributions and include:
- Disability insurance
- Roth 401(k)
- Union dues
- Flexible spending accounts
- Some healthcare benefits
- Transportation programs
- Schedule A deductions (e.g., medical expenses, taxes paid, interest paid, gifts to charity, casualty and theft losses, garnishments)
Visibility on W-2s: Understanding Reporting Practices
In most cases, W-2 forms predominantly display pre-tax deductions. However, specific situations may lead to after-tax deductions being listed. For instance, voluntary after-tax contributions to a non-Roth pension plan can appear in Box 14. Familiarizing yourself with these distinctions is crucial for accurate financial planning.