For many folks, the economy is still not so great, and conserving cash is a big concern. And even if you’re doing fine out there, having more cash cannot possibly hurt. One super-easy way to put more in your pocket is by taking advantage of tax-saving opportunities at your job. Soon it will be time to sign up for these deals for 2016 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 a 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. Currently, the maximum amount you can contribute is $2,550, but the IRS might announce a slightly higher inflation-adjusted figure by the time you sign up. Your contribution will be withheld in installments from your 2016 paychecks. You can then use the FSA money to reimburse yourself for uninsured medical expenses (insurance deductibles and copays, prescriptions, dental and vision care costs, and so forth).
The total amount withheld from your paychecks during 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 too). Reimbursements from the FSA to cover qualified health care expenses are tax free.
The health care FSA deal allows you to pay for all or a portion of next year’s 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 to benefit, and the signup deadline will be here soon.
The only downside to the FSA deal is the dreaded “use-it-or-lose-it” rule. If you don’t incur enough qualified expenses to drain your FSA each year, any leftover balance generally reverts to your employer. Not good! Thankfully, for health care FSAs, there are two helpful exceptions to the lose-it-or-lose it rule.
- Your company plan can allow a 2 1/2-month grace period for unused FSA balances. If it does, you will have until March 15, 2017 to incur enough expenses to use up your 2016 contribution.
- Alternatively, the 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 2016, you can carry that amount over to cover expenses incurred in 2017.
Your company plan can offer either the 2 1/2-month grace period deal or the $500 carryover deal, but not both. The company (not you) makes the choice about which of the two deals is available.
Dependent care flexible spending account
Many company FSA plans are also set up to reimburse employees for qualified dependent care expenses, which means costs to care for a dependent child under age 13, 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 ($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 during 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. Once again, this deal allows you to pay necessary expenses with pretax dollars, which puts extra cash in your pocket every month. 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. Your company plan can offer the 2 1/2-month grace period deal for unused dependent care FSA balances, but the $500 carryover deal is not allowed (it’s limited to health care FSAs).
Last but not least, your employer may also allow you to sign up to reduce your 2016 salary to pay for transit passes to get to and from work and for parking. Here are three things to know:
- Currently, the maximum monthly amount you can set aside for transit passes is $130, but there’s a chance that our beloved Congress will increase the monthly limit to $250 plus a possible modest inflation adjustment. Stay tuned for that.
- Currently, the maximum monthly amount you can set aside for parking is $250, but there may be a modest inflation adjustment.
- 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 at least $380 a month (maybe more if Congress increases the allowance for transit passes and we get inflation adjustments).
Once again, the total amount withheld from your 2016 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, this deal allows you to pay necessary 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 don’t really add up to that much. Not true! Here’s the proof. Say your combined federal and state income-tax rate for 2016 will be 33 percent, and you sign up to reduce next year’s salary by a total of $12,100 ($2,550 for health care FSA contributions, $5,000 for dependent care FSA contributions, and $4,550 for transit passes and parking). Your income tax savings would be $3,993 ($12,000 x 33%), and your Social Security and Medicare tax savings could be as much as $926 ($12,100 x 7.65%). So we are talking about putting up to an extra $4,922 in your pocket, which amounts to $410 a month just for filling out some simple enrollment forms. Wow! Be smart: Sign up to participate before the open enrollment deadline expires. It’s definitely worth the small effort.
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2015 Dow Jones & Co. Inc. All rights reserved.