After-Tax Deduction

What Is After-Tax Deduction?

An after-tax deduction is a tax that is subtracted from a taxpayer’s gross earnings after taxes (federal, state, and local income, Social Security, and Medicare) are withheld. After-tax deductions can vary by state, but may include 401(k) contributions, employer-sponsored pension plans, 529 college savings plans, union dues, disability and life insurance policies, and charitable contributions.

Here’s a simplified example for calculating an after-tax deduction:

Caroline’s gross wages are $1,000.00. Her FICA taxes are 7.65%, additional taxes total $75.00, and her Roth 401(k) after-tax deduction is 4%.

Here’s how Caroline’s take-home pay is calculated:

  • Multiply the gross pay by the FICA percentage: $1,000.00 X 0.0765 = $76.50

  • Multiply the gross pay by the deduction percentage: $1,000.00 X 0.04 = $40.00

  • Subtract the FICA amount from the gross pay: $1.000.00 - $76.50 = $923.50

  • Subtract the additional taxes from the new total: $923.50 - $75.00 = $848.50

  • Subtract the deduction amount from the new total: $848.50 - $40.00 = $808.50

Caroline’s take-home pay equals $808.50.

What Is a Standard (Std) After-Tax Deduction?

A standard (std) after-tax deduction is a fixed dollar amount that can be used to reduce the amount of tax liability. A taxpayer can decide whether to claim the standard after-tax deduction or to itemize deductions. The standard deduction allows a taxpayer to take a deduction even if there is nothing to itemize, eliminates the need to itemize, and reduces the need for keeping expense receipts.

Amount of Standard After-Tax Deduction

The standard after-tax deduction amount varies by year and depends on the following:

  • Income
  • Age
  • Filing status
  • Whether or not the taxpayer is blind
  • Whether or not you are married or a qualified widow

However, as of 2018, the standard deduction is as follows:

  • For single or married filing separately = $12,000
  • For married filing jointly or qualifying widow(er) = $24,000
  • For head of household = $18,000
  • For single or head of household over age 65 or blind, there is an increase of $1,600
  • For married or qualifying widow(er) over age 65 or blind, there is an increase of $1,300

Who Can’t Use the Standard After-Tax Deduction?

Taxpayers who can’t use the standard deduction include:

  • Someone filing “married filing separately” whose spouse itemizes deductions.
  • Someone who files a tax return for a period of less than 12 months.
  • Someone who was a nonresident or dual-status alien during the year (unless that person is married to a U.S. citizen or resident alien and chooses to be treated as a U.S. resident).
  • An estate or trust, common trust fund, or partnership.

What Is the Difference Between Pre-tax and After-Tax Deductions?

The main difference between pre-tax and after-tax deductions is when the deductions are withheld from a paycheck. Pre-tax deductions are subtracted from the employee’s gross pay before taxes are withheld. After-tax deductions are subtracted from the employee’s net pay after taxes are withheld.

The primary advantage of pre-tax deductions is that they reduce the reportable W2 income, effectively lowering the taxes due. The primary disadvantages are that the take-home pay is lower and future benefit payments will be taxed upon withdrawal.

The primary advantage of after-tax deductions is that the take-home pay is higher, while the primary disadvantage is that the tax liability is also higher.

List of Post-Tax Deductions

Here is a list of post-tax deductions:

Flexible Savings Accounts

Flexible spending accounts that can offer a post-tax deduction include:

  • Medical expenses
  • Dependent care
  • Health premiums
  • Adoption assistance

Schedule A Deductions

Schedule A deductions include:

  • Medical and dental expenses
  • Taxes you paid
  • Interest you paid
  • Gifts to charity
  • Casualty and theft losses

Garnishments

Some employees will have an Income Withholding order requiring an employer to garnish wages from the employee’s paycheck.

Reasons for a wage garnishment include unpaid and overdue:

  • Taxes
  • Child support
  • Student loans
  • Credit card debt
  • Medical bills
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