Deductions & credits

Section 125 is simply a section of the tax code that describes a number of different employee fringe benefits they can be paid pre-tax. Health insurance is just one of these, by paying health insurance pretax, it is removed from your taxable income before your taxes are counted. It lowers your taxable income shown in box 1 of your W-2.  For example, if you knew that you were gross salary was $60,000, and you also knew that you paid $3000 in health insurance premiums, you would expect that box 1 would show $57,000 of income.  (it may not be that simple to calculate if you have other section 125 deductions, but that is the basic principle.)  Section 125 fringe benefits lowers your taxable income and so lowers the amount of tax you will ultimately owe to the government.

 

This has nothing to do with the amount of your refund. The amount of your refund is determined by comparing your payments during the year, which includes withholding and other payments, with the tax you actually owe based on your income, deductions, and credits. If you owe $6000 in tax and you had $6000 of withholding, you would break even at tax time. If you had paid in $8000 of withholding, you would get a $2000 refund, but that does not actually change the tax that you owed for the year.