Three Tax Planning Ideas for 2008
This is the time of year that everyone (myself included) wants to help you with what you did in the current tax year. I want to help you with tax planning for the upcoming year.
Taxes do not have to be a magical mystery tour! Note: The examples shown here were created using the tax estimator portion of our free Excel budget program (Free Excel Budget Spreadsheet).
For our example we will use a family of four with a gross income of $50,000. Further, we will only look at deductions that do not require you to file an itemized tax return.
Reducing your Taxes - Cafeteria Plans
Usually referred to as Flexible Savings Accounts, these plans allow you to contribute pretax income for healthcare and dependent care expenses. You must do your homework through as these plans are "use the money or lose the money".
Health Care
You will need to get the details for your particular plan with your employer, but typically the following items are reimbursable.
- Co-pays for prescriptions or medical services
- Portions of medical bills not covered by your deductible
- Over the counter drugs
- Dental Care including braces
- Vision Care
- Ambulance Service
- Medical Equipment bought or rented as results of a prescribed medical problem
Lets assume our family of four usually incurs $2000 a year in these type of expenses. By placing this $2000 into a pretax healthcare cafeteria plan would result in a $300 pretax savings. This means you will get an extra $300 income by placing the $2000 into this plan. If you only end up spending $1700 during the year on these type of expenses you would still break even. Folks, this is deal that offers to put more of your income back into your pocket. The only thing required on your end is to know how much you spend on these type of expenses in a given year. If you are not sure, make a conservative estimate.
Dependent Care
By law your employer can allow you to contribute up to $5000.00 a year for this type of year. If you are paying child care for just one child it is likely you could be paying this amount for a years worth of day care. For our example family lets assume they are spending $5000,00 a year in child care expenses. By utilizing this benefit they would realize an additional $750 a year in income.
The Dependent Care cafeteria plan can also be used for various types of elderly care. See the specific details of the plan your employer offers for the details.
So far we have saved our family of four $1050.00 for expenses that they normally incur. This is real cold hard cash. By utilizing these benefits (if they are available to you through your employer) our family would get an extra $87.50 a month in income!
Reducing your Taxes - 401k
Save for Tomorrow Can Bring Savings Today!
About 1/3 of you out there do not participate in your employers 401k. While I acknowledge that a very small percentage of you have a good reason not to, for the rest of you... ARE YOU NUTS!!! First of all, most employers match to a certain percentage. If an employer matches the first 3% and you do not participate you are giving away 3%. For our family that makes $50,000, they would be turning down $1500.00 that your employer is willing to pony up towards your retirement. Think of it in these terms. Our family of 4 just saved $1050 by signing up for pretax cafeteria plans for dependent care and child care. If they added another $450 dollars of their income ($37.50 a month) they could realize $3000 in retirement savings for the year. Also, look at it in these terms... their $1500 towards a 401k actually is $3000.00 considering the employers match. They inherently make a 100% return on their investment.
But, lets assume that our family of four can afford to put away 8% towards a 401k. This would add another $600.00 a year in tax savings. Take a look at what we have accomplished by participating in these three pretax employer benefits.
- Annual tax savings of $1650 a year ($137.50 a month in income).
- $5500 towards retirement for a cost of $3400 (employers contributes $1500 and we save $600 in taxes.
