Open enrollment time is right around the corner. Here's how to take advantage.
By BILL BISCHOFF
Times are tough, and conserving cash is important. One easy way to do that is by taking advantage of tax-saving opportunities at your job. Soon it will be time to sign up for these deals for 2012 during your employer's open-enrollment period. Here's what you need to know to about three options that can painlessly increase your monthly cash flow by reducing your taxes.
Healthcare Flexible Spending Account
Under an employer-sponsored health care flexible spending account (FSA) plan, you make an election this year to contribute a designated amount of next year's salary to your personal FSA. Contributions will be withheld from your 2012 paychecks. You can then use the FSA money to reimburse yourself for uninsured medical expenses (insurance deductibles and co-payments, prescriptions, dental and vision care and so forth).
The total amount withheld from your paychecks is treated as a "salary reduction" for federal income tax, Social Security tax and Medicare tax purposes (usually for state income tax purposes, too). Reimbursements from the FSA are tax-free. (Many employers place an annual cap, often $3,000, on the amount an employee can contribute to a health care FSA.)
The health care FSA deal allows you to pay for all or a portion of your 2012 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. However, you must enroll in your company's FSA plan to benefit, and the deadline for 2012 will likely be in the next month or two (check with your employer).
The only downside of the FSA deal is the dreaded "use it or lose it" rule. If you fail to incur enough qualified health care expenses to drain your health care FSA each year, any leftover balance reverts to your employer. In other words, you cannot carry over unused 2012 FSA contributions to cover 2013 expenses. However, your company's plan may allow a 2 -month grace period to ease this concern. If so, you will have until March 3, 2013, to incur expenses to be reimbursed out of your 2012 contributions. In any case, you should carefully estimate your expected health care expenditures before deciding how much to contribute for 2012.
Dependent Care Flexible Spending Account
Many FSA plans are also set up to reimburse employees for qualified dependent care expenses, which means costs to care for an under-age-13 dependent child, a disabled spouse, or a disabled person for whom you provide over half the support. The dependent care expenses must be necessary in order for you to work, or for both you and your spouse to work if you are married. The annual amount contributed for dependent care expenses cannot exceed $5,000, or $2,500 if you are married and file separately from your spouse. If you are married and file jointly, the $5,000 limit represents a combined maximum for both you and your spouse.
The total amount of dependent care FSA contributions withheld from your paychecks for 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. So, once again, this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket. Once again, the tax savings are permanent, but you must sign up during the upcoming open enrollment period to benefit.
Note that 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.
Your employer may also allow you to sign up to reduce your 2012 salary to pay for transit passes, van pooling, and parking to get to and from work. The maximum monthly amount you can set aside in 2012 for transit passes and van pooling (separately or together) will probably be $240 (or $125 if our beloved Congress fails to extend the current higher limit). The maximum monthly amount for parking in 2012 will be $240. 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.
Once again, the total amount withheld from your 2012 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, once again, this deal allows you to pay 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. For example, say your combined federal and state income tax rate for 2012 will be 33%, and you sign up to reduce next year's salary by a total of $10,880 ($3,000 for health care FSA contributions, $5,000 for dependent care FSA contributions, and $2,880 for monthly parking). Your income tax savings would be $3,590 ($10,880 x 33%), and your Social Security and Medicare tax savings could be as much as $832 ($10,880 x 7.65%). So we are talking about putting an extra $4,422 in your pocket, which amounts to $368 a month, just for filling out the enrollment forms. Be smart: Sign up to participate. It's worth the small effort.