Valued GBE Clients,
Many parts of health and child care are noted in the tax code. Not everyone realizes the depth or extent this is true. Let’s examine a few topics that people tend to overlook.
Health Savings Accounts (HSA)
Most employer-provided health insurance coverage is considered to be a high deductible plan (check with your advisor first). This creates an option for the taxpayer to contribute to a savings account set aside for qualified medical expenses either for yourself or your family (commonly called an HSA). Based on current tax laws, HSA contributions are one of the few ways working individuals/families may receive tax deductions for medical costs.
Many people are aware that HSA contributions are a tax deduction. Not everyone is aware they can save an additional 7.65% by making those contributions through payroll at work (Note: Church Workers an additional 15.3%!!!). Payroll contributions are pre-tax — meaning they are not subject to federal income tax, state income tax, or FICA tax (FICA rate is currently 7.65% for employee share).
While contributions directly to HSA (Ex: writing a check into your HSA account) saves federal and state income tax, it does not save the additional FICA tax offered through payroll contributions.
Dependent Care Flex Spending Account (FSA)
We often hear the question: My employer offers Daycare FSA, is it worth it for us? Tax-wise, the answer is often yes. Since the FSA is funded by pre-tax dollars, it reduces your federal and state income tax as well as the 7.65% FICA tax.
The Dependent Care FSA has a cap of $5,000 in contributions per year, per household (Ex: you and spouse cannot exceed $5k combined even if both employers offer FSA). Conversely, the Child Dependent Care Tax Credit allows an income-based credit up to $3,000 of expenses for one child and $6,000 for two or more.
Each tax situation is different, but generally speaking the FSA option makes sense for:
- One child, anticipated child care costs of $5,000 or more for the year
- Two or more children, parent(s) earn $105,000 or more, anticipated child care costs of $5,000 or more for the year
Drawbacks of the FSA include the use-it-or-lose-it account design, tracking receipts, waiting for reimbursements, and the fact that not all employers offer this option.
Arm yourself with these potential tax saving ideas. And as always consult your GBE advisor as needed!