An extra clever thing you can do with your benefits is use them to pay less in taxes every year, and most employers will have a system in place that will allow you to have eligible expenses removed from your paycheck before you even get it. When you start a new job, try to get all of this set up before your first paycheck (especially retirement savings) so that you won't even miss it. A big perk available to you is the ability to pay for things pre-tax. This is a big enough deal that I wrote this whole post about it.
Pre Tax- Pre tax
means it comes out of your paycheck before the taxes do. Money spent pre-tax is money you don’t pay
taxes on! It’s legit, because only
certain things are eligible (health insurance, some healthcare expenses,
childcare expenses, transportation to work, certain types of retirement savings.)
Let’s say you make $35,000 a year. You’d
have to pay taxes on $35,000. But, say
you take advantage of the pre tax free money.
You might spend $600 a year on monthly passes, contribute $1,500 to your
retirement, put $300 aside for healthcare expenses, and part with $2,400 for
insurance premiums. If you do that,
you’d only be paying taxes on $30,200.
All else being equal, a single, childless person would save $720 that
year on their taxes. You can see how this will add up faster and faster as these expenses rise, and as you move into higher tax brackets. Not only do you not
have to do anything, it’s actually
easier than paying for stuff the regular way because it gets taken out of your
paycheck automatically, and you never even miss it! But of course, this only
saves you money if you are spending it on things you would buy anyway.
Fun Times Tax Note: As we know; many of us do not itemize
our deductions and go with the standard deduction instead. But you can still reduce your tax liability
with these “above the line” deductions, which include Health Savings Accounts,
interest paid on your student loans, and some retirement savings.
Confused? Just use Turbo Tax.
Flexible Spending
Accounts (FSA)- These allow you to take full advantage of the pre-tax
situation described above. There are
three types- one for healthcare expenses, one for dependent care, and one for
parking and transit. The way they work
is at the beginning of the year you decide how much you want to put in each,
and let your HR/Payroll people know.
Then, a bit will be deducted from each check. I put $200 in my healthcare one and I get paid
weekly, so each check has a deduction of about $3.80. You can then use this money on eligible
expenses. For heath that includes tons
of things, from copays and prescriptions to band-aids. You can use your transit one for train and
mass transit tickets and passes or parking at work. Dependent care covers things from preschool
tuition and nannies to day programs for dependent adults. Some questions to ask
if you’re considering signing up:
Will you have a debit card you can use
right when you buy things or will you have to save your receipts and send in a
claim?
Is there an administrative
fee?
What expenses are
eligible?
What happens at the end of
the year? Employers can choose between a
grace period that allows you to continue using the money until March, or a $500
rollover, where up to $500 of money not spent by December 31st will
be added to your account for the next year.
Be aware that this benefit is possible because the IRS
allows it, so none of the rules are negotiable, and that includes a maximum on
the amount you can contribute, rules about when you can sign up, and the fact
that unspent money is lost forever. So
think very carefully about how much you’ll spend over the year.
One way to decide how much you need is to refer to the
Explanation of Benefits (EOB) your Heath Insurance company sends to the person
who holds your plan. This will tell you
how much you spent out of pocket and that number can be a good reference.
You can see that we are getting a bit deeper into the nitty gritty here, and if you're excited about all that just wait, because soon I'll be posting about insurance, and after that we'll tackle health insurance together.
