Looking ahead to income taxes for 2011, many people who own luxury homes may be in danger of losing the Bush-era tax cuts they now enjoy. As the lame duck Congress considers extending or ending those cuts, it seems the most likely group to lose out is the “wealthy” Americans – couples making $250,000 or more a year.
Whether you fall into this category or not – and whether those tax cuts end up being extended or not – it’s wise to look at ways you can keep extra money for yourself and away from Uncle Sam. Many companies are now undergoing open enrollment for their benefits, and this may give you just the chance you need to keep more of your money.
Equifax Personal Finance blog tax expert Eva Rosenberg talks about using the open enrollment period to set up a flexible spending account (FSA). Her article, “
Open-Enrollment and FSAs: A Bonanza of Tax Advantages,” explains that you can avoid paying federal or state income taxes and FICA/Medicare taxes on money you will spend for certain expenses. Income taxes range from 15 to 35 percent of income, and FICA/Medicare taxes are 7.65 percent, for a total of anywhere from about 22 to about 42 percent savings on the dollars you set aside.
To participate in your company’s FSA, think ahead about the amount of money you expect to spend on childcare expenses and medical expenses. If you’re planning to adopt a child in 2011, think about the expenses you’ll incur there as well. The total amount you estimate will be divided by 12 and set aside from your paycheck each month. The money will come out before taxes are assessed, meaning you get paid that money tax-free. When you spend money, you submit a receipt to the account administrator, and you’re repaid (even if you haven’t yet paid all the funds into the account).
Be conservative in your estimates, though. You will not get back any money you don’t spend during the year. The
Equifax Personal Finance blog lists more tips and pitfalls, so read it carefully before you sign up for an FSA. If you have any questions, you can post them there for Rosenberg to answer.