Tax Time Is Here- Do Things The Right Way
Did you know that there are many different ways that your benefits can help you save money during tax time? Your HR experts at Optimum Employer Solutions have gathered some of the best benefits to ensure you are aware of them during tax season:
401(k)s are funded with “pre-tax” dollars. This means that the contributions are taken from your paycheck before any taxes are deducted. Therefore lowering the amount of income you have to pay taxes on. You will eventually pay taxes on these contributions, but not until you begin withdrawing funds during retirement. At that point, it is likely you will be in a lower tax bracket. At this point, you will only have to pay taxes on the amount that you withdraw. This saves you a lot of money in the long run.
Compensation and contribution limits for a 401(k) are subject to annual cost-of-living adjustments. The limits for 2020 are:
- Salary deferrals – $19,500
- An additional $6,500 if the employee is age 50 or older
A 401(k) is not the only way you can reduce your tax bill each year. A Health Savings Account (HSA) works in conjunction with a high deductible health plan. When you enroll in this type of plan, you can set up an HSA and have a portion of your salary go into your HSA account. The money goes into your account pre-tax and can be withdrawn tax-free as long as you are using it for eligible expenses. Like a 401(k), there are limits to the amount of pre-tax contributions you can make each year. For 2020, the limits are:
- Single coverage – Up to $3,550
- Family coverage – Up to $7,100
- If you are age 55 or older, you may make an additional $1,000 annual contribution for the year
These contribution limits include any contributions made by you and your employer.
One of the biggest mistakes employees make with their HSA is not putting enough funds in it. Because your contributions are carried forward and accumulate, it makes sense to open this kind of account.
Another tax saving benefit is a Flexible Spending Account. Health FSAs let you pay for medical expenses that you know you will need to pay for in the future with pre-tax dollars. The account is owned by the employer and is funded with pre-tax dollars to cover your healthcare and your dependents’ healthcare costs that are not covered under the employer’s health benefit plan. Along with your personal FSA, you can also have a Dependent Care Flexible Spending Account. This type of FSA works the same as a health FSA, and assists parents with childcare expenses for children age 12 and younger. You can also use it to pay for the care of any other dependents, such as parents or grandparents that live in your home. Along with medical care expenses, you can use these contributions to pay for child/elder care at your home and daycare.
The annual limit for FSAs in 2020 is:
- Health – $2,750
- Dependent Care – $5,000
The major benefit of an FSA account is that you can pay for your medical expenses and dependent care expenses with pre-tax dollars. Both you and your employer can contribute to your FSA, but all contributions must not exceed the annual limits. Money that is put into your FSA and remains unspent during the calendar year is returned to the employer. However, the IRS does allow $500 per year to roll over to the next year.
Did you know that you can also allocate some of your earnings before tax to help pay for your daily commute to work? You can qualify to set aside $270 in pre-tax dollars per month towards your commute to cover:
- Parking your vehicle at work or at a location you commute from such as a train station or park and ride lot
- Transportation passes to and from work, including the cost of tokens, fare cards, vouchers, etc.
- Public transportation
The More You Know
If you believe that you are eligible for any of these tax benefits, it is important to speak with HR about signing up. Employees must sign up for these plans during their open enrollment period so it is important to act during the designated time to maximize your savings.