What?!? Reduce my income?
Why not just cut back on my treats too!
The idea is to reduce your taxable income thereby reducing your personal income taxes.
Here are three simple ways to use your employer provided benefits to do so.
Flexible Spending Account
Use your employer provide FSA! It can be funded with voluntary employee pretax dollars to pay for unreimbursed medical, dental and child care expenses. If you’re lucky your employer may kick something in as well. FSA’s are used to pay for deductibles, co-payments, prescriptions, etc..
Keep in mind FSA’s are a “Use it or Lose it”, meaning you have until the end of the year to spend the money in your FSA or forfeit it . Yikes! (Some plans provide a 2.5 month grace period after the end of the year)
So plan conservatively at the beginning when contributing to your FSA. ( We will discuss Health Savings Accounts in future posts 🙂
Transit Spending Accounts
Also typically through large employers, you could pay for things like a transit pass (MBTA in Boston) or qualified parking with pretax money. This really adds up over the course of a year.
You typically have to go through your employer to buy the pass, but it’s a no brainer if it’s offered.
Defined Contributions Plans
More commonly known as 401(k) or 403(b) plans, where you make pre-tax contributions to your employers retirement plan. By investing part of your paycheck, you reduce your income taxes, possibly get a match on your contributions, your money grows tax deferred and you are saving for retirement. Woof!!!!
Example ran with an online calculator
at Dinkytown.net, which has a host of great calculators. (I’m sure there is a really good story behind that website name)
with a single person earning $60,000 a year.
= Taxable Income of $53,650 approximately
=Taxes of $9,151 approximately
For comparison purposes, we contributed $3,600 to a 401(k), $500 to a FSA, and $4,800 for Transit and Parking combined for the year.
=Taxable Income of $44,750 approximately
=Taxes of $6,926 approximately
That’s an annual saving of $2,225 annually approximately on your taxes!
So review the benefits offered by your employer today. Get on it, right now.
Stay tuned for Part B. 🙂