When it comes to managing healthcare costs, how you pay can be just as important as what you pay for. Many employees don’t realize that everyday healthcare expenses—like doctor visits, prescriptions, dental work, and even certain over-the-counter items—can be paid with pre-tax dollars through benefit programs such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs).
What Are Pre-Tax Healthcare Dollars?
When you receive your paycheck, taxes like federal income tax, state income tax, and FICA (Social Security and Medicare) are deducted before you see the net amount. Normally, you pay for your healthcare expenses with what’s left—your after-tax dollars.
Pre-tax healthcare programs let you set aside part of your salary before taxes are applied, and use that money for eligible medical expenses. Because these contributions are not taxed, your money goes further.
Why It Matters: A Simple Example
Let’s say you expect $750 in eligible healthcare expenses this year.
- Without a pre-tax plan: You would need to earn about $1,000 in gross wages (assuming a combined tax rate of 25%) to have $750 left after taxes.
- With a pre-tax plan: You only need to set aside $750 from your paycheck—no extra gross income required.
In this example, you save $250 simply by changing how you pay.
Common Eligible Expenses
Depending on your plan, you can often use pre-tax dollars for:
- Medical office visits and copays
- Specialist visits
- Prescription drugs
- Over-the-counter medications and supplies
- Dental cleanings, fillings, and orthodontics
- Vision exams, glasses, and contact lenses
- Medical devices like crutches, CPAP machines, and blood pressure monitors
(Always check your plan’s list of eligible expenses.)
The Benefits Add Up
- Lower Taxable Income – Reducing the amount of income subject to tax can mean hundreds of dollars in savings each year.
- Predictable Budgeting – Setting aside funds through payroll deductions spreads out costs evenly across the year.
- Immediate Access – For FSAs, you often have access to your full annual election amount at the start of the year.
- Broad Coverage – Eligible expenses cover a wide range of health needs, from routine check-ups to emergency care.
Disclaimer: This article is for informational purposes only and is not tax or legal advice. Consult your tax advisor or benefits administrator for guidance on your specific situation.