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.
In 2022, you can contribute up to $20,500 to your account, or $27,000 if your 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 …….