Friday, October 17, 2014

3 open enrollment options that can reduce your taxes

Bill Bischoff for Marketwatch.com writes:  For many folks, the economy is still less-than-great and conserving cash is still a high priority. One super-easy way to put more in your pocket is by taking full advantage of tax-saving opportunities at your job. Soon it will be time to sign up for these deals for 2015 via the so-called open enrollment process. Depending on where you work, the open enrollment period can begin before the end of this month. So get ready! Here are three open enrollment options that can painlessly increase your monthly cash flow by reducing your taxes.

Health care flexible spending account
Under an employer-sponsored health care flexible spending account (health care FSA) plan, you make an election this year to contribute a designated amount of next year’s salary to your personal health care FSA. The maximum amount you can contribute is $2,500. Your contribution will be withheld in installments from your 2015 paychecks. You can then use the FSA money to reimburse yourself for uninsured medical expenses (insurance deductibles and co-pays, prescriptions, dental and vision care costs, and so forth).
The total amount withheld from your paychecks 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 to cover qualified expenses are tax-free.

The health care FSA deal allows you to pay for all or a portion of your 2015 out-of-pocket medical costs with pretax dollars. That’s the same as getting an income tax deduction combined with a reduction in your Social Security and Medicare tax withholding. The tax savings are permanent - not just a timing difference. But you must enroll in your company’s FSA plan to benefit, and the deadline for 2015 signups will be here soon.
The only downside to the FSA deal is the “use-it-or-lose-it” rule. If you fail to incur enough qualified expenses to drain your FSA each year, any leftover balance generally reverts to your employer. However, for health care FSAs, there are two big exceptions to the lose-it-or-lose it rule.
  • Your company plan can allow a 2½-month grace period for unused FSA balances. If so, you will have until March 15, 2016 to incur enough expenses to use up your 2015 contribution.
  • Your company plan can allow you to carry over unused health care FSA balances of up to $500 from one year to the next. So if you have a $500 unused balance at the end of 2015, you can carry that amount over to cover expenses incurred in 2016.
Your company plan can offer either the 2½-month grace period deal or the $500 carryover deal, but not both. The company (not you) makes the choice about which of the two is available.
Dependent care flexible spending account
Many FSA plans are also set up to reimburse employees for qualified dependent care expenses, which means costs to care for an under-age-13 dependent child, a disabled spouse, or a disabled person for whom you provide over half the support. The dependent care expenses must be necessary for you to work, or for both you and your spouse to work if you are married. The annual dependent care FSA contribution cap is $5,000 (or $2,500 if you are married and file separately from your spouse). If you are married and file jointly, the $5,000 cap represents a combined maximum for both you and your spouse.
The total amount of dependent care FSA contributions withheld from your paychecks for the year is treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes as well). Reimbursements from the FSA are tax-free. So, once again, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket every month. Once again, the tax savings are permanent, but you must sign up during the upcoming open enrollment period to benefit.
The use-it-or-lose-it rule also applies to dependent care FSAs, so make sure you don’t contribute more than the qualified expenses you expect to incur next year. Note that your company plan can offer the 2½-month grace period for unused dependent care FSA balances, but the $500 carryover deal is not allowed.
Transportation expenses
Last but not least, your employer may also allow you to sign up to reduce your 2015 salary to pay for transit passes, van pooling, and parking to get to and from work.
  • The maximum monthly amount you can set aside in 2015 for transit passes is expected to be $130, but there is a good chance that our beloved Congress will increase the monthly limit to $250. Stay tuned for that.
  • The maximum monthly amount you can set aside in 2015 for parking is expected to be $250.
  • If you sign up for both deals (say for the train to go to and from work and for parking at a park-and-ride lot near your home), you can combine the two limits and set aside up to $380 a month, or up to $500 if Congress increases the allowance for transit passes.
Once again, the total amount withheld from your 2015 paychecks will be treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes as well). So, once again, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket every month.
The bottom line
Surveys repeatedly show that most folks fail to participate in these employer-sponsored tax-saving arrangements, apparently because they figure the tax savings won’t really add up to that much. Not true! For example, say your combined federal and state income tax rate for 2015 will be 33%, and you sign up to reduce next year’s salary by a total of $12,000 ($2,500 for health care FSA contributions, $5,000 for dependent care FSA contributions, and $4,500 for monthly transit passes and parking). Your income tax savings would be $3,960 ($12,000 x 33%), and your Social Security and Medicare tax savings could be as much as $918 ($12,000 x 7.65%). So we are talking about putting an extra $4,878 in your pocket, which amounts to $406.50 a month, just for filling out the enrollment forms. Wow! Be smart: sign up to participate before the open enrollment deadline expires. It’s worth the small effort.

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