If you’ve discovered while preparing your 2021 tax returns that you actually owe federal income taxes, your employer’s benefits program may help you reduce your taxable income and improve your quality of life. And if you have a side gig and find yourself owing FICA (Social Security and Medicare) taxes, we have a couple of tips for you, too.
Here are five tax-reducing options your company may offer.
1. Retirement plan contributions
There’s no better way to lower taxes today while saving for the future than by maximizing contributions to your employer’s retirement plan, whether it’s a 401(k), 403(b) or a 457 plan.
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In 2022, you can contribute up to $20,500 to your account, or $27,000 if you are 50 or older. Every penny you contribute on a pre-tax basis reduces your taxable income, year after year. And if your company matches some of your contributions, you’ll get an added boost toward building the nest egg of your dreams.
2. Health Savings Accounts
If you’re enrolled in a high-deductible health plan (HDHP) at work, chances are your employer also offers a health savings account (HSA) option.
HSAs are funded with pre-tax contributions from your paycheck, up to a maximum of $3,650 per individual ($7,300 per family) with an additional $1,000 in “catch-up” contributions per person if you’re age 55 and older.
Your HSA grows tax free, and you can take tax-free distributions to pay for qualified healthcare expenses, including over-the-counter medications, medical equipment, dental expenses, physical therapy and even acupuncture and aromatherapy.
If you change jobs, you can take your HSA to your next company or transfer your balances into an HSA offered by a financial services company.
3. Flexible Savings Accounts
Companies that don’t have HSAs often offer flexible savings accounts (FSAs) as an alternative.
You can fund your FSA with pre-tax contributions of up to $2,850 per year. As with HSAs, assets in your FSA grow tax free and you can take tax-free deductions to pay for qualified healthcare expenses.
The main difference between FSAs and HSAs is that you generally must spend all the money in your FSA by the end of the plan year. However, your employer may either give you up to 2½ months after your plan year ends to use the leftover money or allow you to carry over up to $570 to use in the new plan year.
Unlike HSAs, you can’t transfer your FSA. If you change employers, you must either use the money in your FSA before you leave or forfeit the balance.
4. Dependent care FSAs
If you have children in daycare, or they attend preschool or summer day camp or participate in before- or after-school programs, a dependent care FSA (DCFSA) can help you pay for these expenses. You can also use it to pay for certain adult care expenses.
Like healthcare FSAs, your can fund your DCFSA with pre-tax contributions and take tax-free distributions to pay for dependent care. You can contribute up to $2,500 per year if you file an individual return or $5,000 if you’re married and file a joint return.
As with healthcare FSAs, you must use all of your DCFSA contributions by the end of the plan year unless your employer provides a grace period or rollover option. And, like FSAs, DCFSAs can’t be transferred to another employer.
5. Life insurance
If you’re considering purchasing term life insurance to provide financial protection for your family, take a look at what your employer offers.
Many companies offer group-term life insurance that employees can pay for through pre-tax contributions.
But be careful. If you pay for more than $50,000 worth of life insurance coverage, the excess will be subject to FICA and federal income taxes. If you want more coverage, consider supplementing the insurance you pay for at work with another policy you purchase on your own.
What about side-gig income?
If you earn additional income from your own business or you receive 1099 income as an independent contractor, you’ll generally have to pay FICA and federal taxes on these earnings. Most people with this extra income make quarterly estimated tax payments. If you wait until you file your returns to pay these taxes you may get hit with late-payment penalties.
The good news is that you may be able to reduce your side-gig tax burden by deducting many of your own business-related expenses. These may include vehicle expenses, business-related cell phone and Internet services, meals with clients or prospects and some of your home office expenses.
Keep in mind that you must keep detailed records of all of these expenses in case you’re the unlucky recipient of an IRS audit.
Want more tax breaks? Turn to the professionals
In addition to helping you decide which tax breaks to take advantage of at work, your accountant or financial adviser can also help you identify other ways to help you reduce or maybe even zero out your annual federal and state tax bills.
Disclaimer
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer or professional tax advisor and a financial adviser.
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