Employees have some special tax-saving considerations to take into account that retirees and other nonworking individuals don't face. Below are three of those opportunities. Please contact us if you need additional information on these items.
Adjustments to federal withholding
Consider adjusting your federal withholding if you usually have a balance due when you file your return and face a penalty for underpayment of federal estimated tax. Perhaps a raise in salary has put you in a higher tax bracket. You can eliminate the penalty and save the pain of a large payment by having a little more withheld each payday. Also, consider an adjustment if you have multiple jobs, both you and your spouse work or you can be by another person as his dependent.
Payroll departments are usually willing to adjust the withholding at any time during the year. Just an adjustment of $50 each payday twice a month will give you $1,200 additional in federal income tax payments for the year.
401(k) contributions
If you are not already contributing the maximum to your 401(k), you can reduce your 2012 tax bill by increasing your contribution. You already know that earnings in a qualified retirement account are not taxed currently, but, don't forget that the amount you contribute this year reduces you taxable income this year, dollar for dollar. The maximum employee contribution for 2012 is $17,000, with an additional catch-up amount of $5,500 for those age fifty and over.
Health flexible spending account
This is a good time of year to review the amount that you will direct in 2012 to a health flexible spending account (health FSA). Look at last year's expenditures and consider any anticipated change in circumstances in 2012.
You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible on your tax return. They would not be deductible if you do not itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.
Mark your calendar to review your balance in December so that you can incur reimbursable expenditures to prevent loss of any unused amount under the use-it-or-lose-it feature of these plans.
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