3 Savings Accounts That Can Lower Your Tax Bill
by Susannah McQuitty
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It’s may seem crazy, but 2016 is already about to come to a close, which means it’s time to start thinking about your 2016 taxes and how to save as much as possible. There are several great ways, but some of the best come in the form of employer-sponsored savings accounts.
Employer-sponsored benefits are basically perks that your employer offers at little to no cost to you as an employee. Let’s break down the benefits and qualifications for three of the most common employer-sponsored saving accounts.
Decoding the 401(k)
A 401(k) is a retirement savings plan where contributions are tax-deferred: you don’t pay taxes on the funds until you withdraw the money later in life. All contributions made through payroll deduction or by your employer are pre-tax dollars, and you can find the amount contributed on Form W-2, box 12. In most cases, employers will match employee contributions up to a certain amount.
The 401(k) is designed as a retirement savings account, and it carries a 10% penalty for withdrawing funds before turning 59 and a half – this is in addition to any income tax that would be owed on the withdrawal. Another reason to consider contributing to a 401(k) is the Saver’s Credit. You might be eligible for this credit, depending on your adjusted gross income.
Flexible Spending Accounts
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) both allow you to contribute pre-tax dollars from your wages, but there are some key differences between these accounts.
First, there are two types of FSAs: healthcare and dependent care. An FSA is a “use-it-or-lose-it” account. If you have funds left over at the end of the calendar year, you lose those funds. Contributions can be made by both you and your employer, but the dollar limit applies to both of your contributions. However, the employer can offer a carryover of up to $500, or a grace period of two-and-a-half months to spend the remaining funds. Employers have no obligation to offer these options. If they choose to do so, they can offer either a carryover or a grace period, but not both.
There are no reporting requirements for FSAs on your tax return. You can withdraw funds from your FSA to pay for qualified medical expenses even if you haven’t placed the funds in your account.
Health Savings Accounts
In order to have a Health Savings Accounts (HSA), you must have a high-deductible health plan. Contributions can be made by both the employee and employer, but the dollar limit applies to both of your contributions.
The balance of an HSA can be carried over from year to year and continues to grow tax-deferred. There’s no “use-it-or-lose-it” rule like an FSA. You can invest your HSA money and get tax-free earnings, so long as you use the money to pay for qualified medical expenses.
You’ll need to include Form 8889 when filing your taxes to show the total amount of contributions and withdrawals. Your direct contributions appear as a deduction on your taxes. Pre-tax contributions made through payroll deduction or by an employer will appear on Form W-2 in box 12.
You should also receive Form 1099-SA from your HSA administrator. This form lists all your withdrawals for the year. If you used any funds for nonqualifying expenses, you’ll have to pay tax on that amount. You’ll also be subject to a 20% penalty if you’re 65 or younger. The burden is on you to prove how you spent the funds, so keep those receipts!
There you have it – Now let’s get to saving!
These are some great ways to save for retirement, budget for healthcare and dependent care expenses, and cut down your tax bill. Talk to your employer and find out what options are available so that you can make your money go further in 2017.
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