Bill Bischoff for the Wall St Journal writes: It is that time of year when a tax reduction is yours for the taking.
Open-enrollment season for 2014 workplace benefits is set to begin soon at most companies—and many employees are eligible to take advantage of three tax-smart options: health-care flexible-spending accounts, dependent-care flexible-spending accounts and tax-saving ways to pay for transportation to and from work. All three can painlessly increase your monthly cash flow by reducing your taxes.
Surveys show that most people fail to participate in these programs, often because they figure the savings don't add up to that much.
In fact, if your combined federal and state income-tax rate for 2014 will be 33%, and you sign up to reduce next year's salary by a total of $12,000 (which many people can easily do), your income-tax savings would be $4,000. Your Social Security and Medicare tax savings could be as much as $918.
You need to take action during the coming open-enrollment season to cash in. Here is what you need to know:
Health-care flexible spending account.
Under an employer-sponsored health-care flexible-spending-account plan, or FSA, you make an election this year to contribute a designated amount of next year's salary to your personal FSA, up to a maximum of $2,500.
The contribution is withheld in installments from your 2014 paychecks. You can then use the health-care FSA money to reimburse yourself for uninsured medical expenses, such as insurance deductibles and copayments, prescriptions, and dental and vision care.
The total amount withheld from your pay is treated as a salary reduction for federal income-tax, Social Security tax and Medicare tax purposes, and usually for state income-tax purposes, too. Reimbursements from the FSA are tax-free.
The health-care FSA allows you to pay for all or a portion of your 2014 out-of-pocket medical costs with pretax dollars. That is the same as getting an income-tax deduction combined with a reduction in your Social Security and Medicare tax withholding. But you must enroll in your company's FSA plan to benefit, and the deadline to sign up for 2014 will be here soon.
The only downside of FSA is the "use it or lose it" rule. Generally, if you fail to incur enough qualified expenses to use up all your health-care FSA balance each year, any leftover balance reverts to your employer.
However, there are two exceptions. First, your company plan may allow a 2½-month grace period to incur enough expenses to use up your remaining balance. Second, the Internal Revenue Service announced on Thursday that employers can amend health-care FSA plans to allow you to carry over an unused balance of up to $500 to use the following year.
Plans can't offer both the 2½-month grace-period deal and the $500 carry-over privilege. It is one or the other. In any case, you should carefully estimate your expected health-care expenditures before deciding how much to contribute for 2014.
Dependent-care flexible-spending account.
Many FSA plans also are set up to reimburse employees for qualified dependent-care expenses—costs relating to caring for a dependent child who is younger than 13 years old when the care is provided, a disabled spouse, or a disabled person for whom you provide over half the financial support and who lives with you for more than half the year.
The dependent-care expenses must be necessary in order for you to work, or for both you and your spouse to work if you are married. The annual FSA contribution cap for dependent-care expenses is $5,000 if you are single. If you are married and file jointly, the $5,000 cap represents a combined maximum for both you and your spouse, even if you both participate in separate dependent-care FSAs. (If you are married and file separately, you and your spouse each are entitled to a separate $2,500 cap.)
The tax breaks that apply to health-care FSA contributions also apply to dependent-care FSA contributions. So does the use-it-or-lose-it rule. The new $500 carry-over privilege for unused balances is only allowed for health-care FSAs, not dependent-care FSAs, though the 2½-month grace period is allowed for both dependent-care FSAs and health-care FSAs that have been amended to include this feature.
Whatever your company plan permits, it is important to make sure you don't contribute more than you can use.
Transportation expenses.
Your employer also may allow you to sign up to reduce your 2014 pay to help cover transit passes and parking to get to and from work.
The maximum monthly amount you can set aside in 2014 for transit passes is $130, and the maximum monthly amount for parking in 2014 is $250.
If you sign up for both deals—say, the train to go to and from work and parking at a park-and-ride lot near your home—you can combine the two limits and set aside up to $380 a month.
As with FSAs, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket every month.
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