As you can see, learning a few simple tax tricks can save you a bundle by reducing your tax liability and putting more money in your pocket.
Flexible Spending Account
A Flexible Spending Account (FSA) can be used to pay for dependent care as well as medical expenses. Contributions are made pre-tax, reducing your tax liability. If you plan on using it for dependent care, make certain your employer has set it up that way.
Contributions up to $5,000 per family/household can be made for dependent care. For 2023 contributions, up to $3,050 can be made for medical expenses. In addition, up to $610 maximum can be rolled over if your employer plan permits. Check with your HR team to determine specific rules for your employer-sponsored plan.
Dependent care is defined as a pre-tax benefit account used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs and child or adult daycare.
In addition to savings on income taxed, you will also save on social security and Medicare tax.
The potential of a childcare tax credit also exists and varies by individual. Check with your tax professional to determine which may be the most advantageous.
The ability to estimate your costs is the most challenging because if you do not use all the funds, you will lose them. There may be an ability to roll over up to $610. This may vary by employer and, again, check with HR.
The rules specify that these limits are family limits. For example, if a husband and wife both have an FSA available, the limit is combined, rather than a separate limit for each spouse.
Again, do a little digging educate yourself and save some taxes.
Health Savings Account
A Health Savings Account (HSA) is similar to an FSA but has some additional benefits not available with an FSA. One important difference is any amounts not used can be rolled over and used in future years. The family limits apply here but the limits are higher.
The HSA limits for 2023 are $3,850 for a single individual and $7,750 for a family. An additional $1,000 is permitted as a catch-up contribution for those over age 55. Again, this is a family limit, a married couple would be capped at $7,750.
Any unused amounts are rolled over to be used at some point in the future. In addition, when your account reaches a certain amount, usually around $3,000, you will be eligible to invest the amount over that amount, essentially acting as a retirement account. These funds can be used in retirement.
All expenses must be for qualified medical expenses. The IRS allows you to deduct unreimbursed payments for preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, prescription medications, appliances such as glasses, contacts, false teeth, and hearing aids, and expenses that you pay to travel for qualified medical care.
HSAs are only available with high deductible plans. It can be a way to fund your deductible and other out-of-pocket expenses.
Once you become eligible for Medicare, you are no longer eligible to fund an HSA. However, the premiums for Medicare can be made from your HSA. This benefit is available only for Medicare and other expenses during retirement. All expenses are paid from your account and are tax-free.
An HSA allows you to make contributions pre-tax, earnings grow tax-free and payments for qualified expenses are paid with these tax-free dollars. If you find that you do not need these funds, you can withdraw them penalty-free after age 59-and-a-half and pay the taxes on the withdrawal, similar to a traditional IRA.
Save More Money
As you can see, learning a few simple tax tricks can save you a bundle by reducing your tax liability and putting more money in your pocket.
For more tax-saving tips, please fine last month’s article at https://quadcitiesbusinessnews.com/how-to-minimize-taxes/
Begin to educate yourself, get professional help and save tax dollars.
Good luck!
You work hard for your money, make sure it stays your money! QCBN
By Steven Calabrese
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner-operator of a website known as thepersonalfinancewizard.com. Such topics as budgeting, investing, paying off debt, and goal setting are discussed.
