FSA Cuts Taxes 6 Ways
6 DifferentTax Saving Possibilities via FSA
With a Flexible Spending Account, you can set aside a portion of each paycheck for eligible expenses. This amount is deducted from your paycheck before taxes are calculated. By pre-taxing these expenses you may realize tax savings six different ways.
Scroll down the page for details on each of the six ways an FSA may save in taxes.
1 Federal Income Taxes
A family contributing $7,000 to an FSA might see the following federal income tax savings.
2 Payroll Tax Savings
An FSA may also reduce the amount you pay in Payroll Tax - specifically FICA tax. FICA stands for Federal Insurance Contributions Act. The tax pays for Social Security and Medicare. FICA is a payroll tax, and withheld by your employer. Both the employee and employer pay the same amount of payroll tax (FICA Tax). You will save 7.65% for every dollar you contribute into a Flexible Spending Account.
For people earning more than $97,500 in W2 income, the FICA tax savings falls to .77%. Be sure to put your FSA dollars into the account of the lower earning spouse.
3 Alternative Minimum Tax Savings
The Alternative Minimum Tax (AMT) is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax. The AMT is triggered by large amounts of itemized deductions.
The AMT sets a rate of either 26% or 28% for income subject to this tax. Large amounts of Medical Expense Deductions may help push you into this extra tax.
A Flexible Spending Account helps reduce your possible exposure in two ways:
* Reducing the amount of Medical Expense Deductions - Thereby lowering your chances of being pushed into AMT
* Reducing reportable income - Thereby reducing the amount of income subject to AMT calculations.
Example - A family putting $7,000 into a Flexible Spending Account would expose $7,000 less in income to the Alternative Minimum Tax - thus generating up to $1,820 in tax savings.
4 Child Tax Credit Savings
This credit is worth up to $1,000 annually per qualifying child. However, the credit is phased out beginning at specified levels of Adjusted Gross Income for each filing status:
Your Child Tax Credit is limited by 5% for each dollar of Adjusted Gross Income above these amounts.
Example - For a family putting $7,000 into a Flexible Spending Account, the Child Tax Credit limitation might minimized by $350.
5 Education Credit Tax Savings
The amount of an education credit is determined by the amount of qualified tuition and related expenses you paid for each eligible student and the amount of your Modified Adjusted Gross Income (MAGI). The credit is worth up to $2,000 annually, and is phased out between $90,000 and $110,000 of MAGI.
A Flexible Spending Account could generate tax savings if your MAGI fell between these two figures.
Example - A family putting $7,000 into a Flexible Spending Account might reduce the amount of Education Tax Credit phase out by 7/20 or 35% equating to $700 of tax savings.
6 State Income Tax Savings
Tax rules, rates, and possible tax savings vary by state. The States of NJ & PA do not recognize Dependent Care FSA pre-tax deductions. NJ does not recognize Healthcare FSA pre-tax deductions.
Example - A family putting $7,000 into a Flexible Spending Account and in the 6% State Income Tax bracket might realize State Income Tax savings of $420.