09 Jan Have You Looked at Your Paycheck Recently?
Yes, I mean really looked at it? For my clients who are employees, this is the time of year that I suggest you really look at your pay stub. Are you taking advantage of all the tax reducing benefits you are offered?
When we meet in the next couple months to do your taxes for 2017, I will probably find a couple things. Maybe you did not fund your 401k enough to capture 100% of your employer match $. Maybe you did not use your Flex and Dependent Care accounts as fully as you could have, maybe you did not present receipts to use all you withheld. Possibly an HSA would have been advisable. Let’s not let that happen again this year.
This year, right now, focus on paying yourself with a few smart money moves.
- I recommend you break out your employee manual and read it thoroughly.
- It may be time to visit your HR representative and ask them to walk you through your benefit options.
- It is definitely time to know your tax savings options and to sign up for them.
- ALWAYS* participate in your company’s 401(k) plan to maximize your company contribution.
A big advantage of a 401(k) is found in the employer match. Employers often offer a matching program for employee contributions to a 401(k). While the percentage amount of the match varies, it is free money offered by an employer that is not received by an employee unless it the 401(k). Bare minimum, I recommend you contribute the minimum $/pay period to maximize your employer match.
Your contribution is pre-tax, reducing your payroll taxes (ex; you earn $50k per year and contribute $3k to your 401(k), reducing your taxable income to $47k). Money held in your 401(k) plan grow tax-deferred. Some employers have “vesting schedules*”, meaning you may not be fully vested in the money they contribute to your 401(k) until you are employed for a period of time. If you are not planning to become vested, the employer match dollars will not benefit you.
Flexible spending accounts.
An FSA is essentially an employer-sponsored benefit that helps pay for medical expenses. During the open enrollment period, you commit to contribute a certain dollar amount to your FSA for the upcoming year. For 2018, the maximum amount you can choose is $2,650. The company puts the full amount you selected into your FSA on January 1 — and then you pay it back with automatic deductions from your paycheck over the rest of the year.
Contributions to your FSA are pre-tax, like the money you put into your 401(k). This gives you two benefits. First, you’re paying for qualified health care expenses for yourself, your spouse, and your eligible dependents with pre-tax dollars — which also reduces the amount of taxes taken out of your paycheck. Note, however, that if you don’t spend all the money in your FSA by year-end, you may have to give up what’s left over.
Health Savings Accounts
Health Savings Accounts (HSAs) are available two ways: 1) directly to individuals outside of any employer involvement, and 2) as part of an employer-sponsored employee benefit plan.
Unlike an FSA, you own and control the money in your HSA. You may also be able to invest the money in your HSA just like you would a 401(k) or IRA — which is also different from an FSA. Plus, you can take the balance with you if you leave your employer. You can also put more money into an HSA — up to $3,450 a year for individuals or $6,900 a year for families in 2018. To be eligible, you must be enrolled in a high-deductible health insurance plan. Specifically, in 2018, your deductible must be at least $1,350 for individual coverage or $2,700 for family coverage.
Voluntary salary reduction plans
Employees may elect to reduce their salaries to cover the cost of child care, dependent care, medical expenses, dental, and vision care expenses. These amounts escape wage taxes – a savings for both the employer and the employee. Again, these plans can be set up by an employer, often through a Flexible Spending Account or Section 125 Cafeteria Benefit Plan by following appropriate design, notification, documentation and accounting procedures.
Fewer people will be able to deduct the cost of out-of-pocket medical costs but amounts paid through insurance can escape taxes entirely. Insurance paid through the employer as a salary-deducted or employer-paid benefit offers the best tax effect. These plans can cover the out-of-pocket cost of medical policy deductibles, dental, vision and other expenses.
Health Care can be pricey — but FSAs and HSAs can help make the most out of your money and cover health care expenses in a cost-effective way. Research your options and run calculations to determine if an FSA or HSA makes sense for you. We can help you understand how these options may fit in with your overall tax strategy for 2018.