2008 is the first year I decided to sign up for the company Flexible Spending Account (FSA). It is an account that is designed to deduct a fixed amount of money each pay period, in which the total amount can be used for most medical, dental, and vision expenses. From that statement, there is no benefit over just a regular savings account, but I will get into the benefits to use to your financial advantage.
Like a 401(k), the amount deducted from a Flexible Spending Account is pre-tax. That means if I make $1000 in a pay period but elect to deduct $50 towards an FSA, then I will only be taxed on the remaining $950. A 401(k) contribution defers taxes for federal and state, but a Flexible Spending Account deduction defers taxes for all taxes - federal, state, social security, and Medicare.
The contribution of a 401(k) can be changed anytime during the year from $0 to the maximum annual limit. With a Flexible Spending Account, the total amount a person wants to contribute has to be decided before the year even starts, and the amount deducted each week is the total amount divided by the number of pay periods. I decided that I wanted to have a total of $250 of Flexible Spending, and because I get paid bi-weekly (26 pay periods per year), I have $9.62 deducted bi-weekly towards my Flexible Spending. But say I want to use $200 of my $250 that I want to contribute to an FSA, and it's only February. At most, I've had about 4 pay periods with a total contribution of just under $40. One good thing about FSA is that you can spend the total amount you elected to deduct for the entire year, even if you haven't contributed to the full amount yet. So I could go ahead and make that eligible $200 purchase towards Flexible Spending. If I left the company, I would not have to pay the difference either. But with one good benefit comes one disadvantage.
Flexible Spending Accounts have limits to when you can use them. The funds do not rollover from year to year. They have the "use it or lose it" rule. Whatever funds that do not get exhausted from Flexible Spending are lost and do not get returned to the recipient. But most plans have a grace period. In my case, the 2008 FSA is good for the entire 2008, plus 3 months grace period until about March 15. The grace period is similar to contributions to an IRA, which can be made to the prior year until taxes are due.
My $250 total Flexible Spending is small because I am single without dependents. I will primarily use it for prescriptions every now and then, but mostly for contact lens solution and accessories. My vision plan at work should cover the cost of contact lenses, otherwise I would have budgeted those into my FSA contribution. Last year I spent about $600 out-of-pocket on prescription glasses. If I had an FSA setup, I would have $150 on federal taxes alone being in the 25% tax bracket. I still would have saved on state taxes, social security, and Medicare.
There are many items that Flexible Spending can be used on - from co-pays to deductibles, to prescriptions, to dependent-care, to medical, dental, or vision. The list is big, and mostly consists of needed medical expenses. Cosmetic enhancements, if not a necessity, are not covered. Some companies even have a debit-card program, so the funds are available to spend right away. Companies that reimburse funds are not the most convenient, but reimbursement method can be used to the advantage of the user.
With my Amex Blue Cash, I get 5% cash back on drug store purchases. So if I had in $50 prescriptions, I would use my credit card to pay for it and receive $2.50 (5%) in cash back. I would then submit my receipts for reimbursement and get back my original $50. I would have made $2.50, for buying something I would have needed anyway.
One of my prescriptions always comes with a rebate. It is a $30 rebate for a very expensive drug. My prescription co-pay is either $10, $20, or $30 depending on the brand, and for the expensive drug, it is $30. I would put the $30 on my credit card, get 5% cash back, submit a copy of my receipt for $30 FSA reimbursement, and submit another copy of my receipt for $30 rebate. Now I just made $30 + 5%.
Today I came up with another technique to use to my advantage. My sister frequently buys prescriptions for her daughter. Her husband's company does not offer Flexible Spending so obviously she can't get reimbursed for her prescriptions. But she can give me the receipts, and I can submit them to get reimbursed for her purchase. I would get the reimbused money back, but because I did not actually pay for my sister's prescriptions, I could use the money for whatever I want. In essence, I received money earned from work tax-free. Now my goal is to get any receipts with Flexible Spending items from other family members. Most of them pay in cash, so credit card names wouldn't show up on the store receipt.
Next year, I will have to increase my Flexible Spending Account to a higher amount to include eligible purchases from my family, that I can use to claim for myself. Just a nice little loophole to avoiding all taxes.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Monday, February 25, 2008
Sunday, February 10, 2008
Fair Tax
Right now, the US is in the middle of primary elections, which will decide each party's candidate for President. One of the candidates still in the running for the Republicans is Mike Huckabee. He is in support of changing the current tax system into the Fair Tax system.
The Fair Tax system would get rid of the IRS, tax brackets, income taxes, social security taxes, Medicare taxes, capital gains taxes, and many other things. Instead, taxes will be applied on purchases of new goods and services.
For example, if I made $50k in a year, I would receive $50k in my pocket under Fair Tax, with none of that deducted for taxes. If I made that much in 2007 as a single filer in the current system, I would only receive $39.5k after deducting federal income tax, social security, and Medicare. That does not include deductions for state taxes.
When it comes down to purchases, Fair Tax impose a 30% sales tax, or 23% effective tax. Imagine a $100 jacket in today's prices costing $130 under Fair Tax. You can either look at it as $30 more than $100, which is 30%, or look at it as $30 of $130, which is 23%. Under the current system, I would have to use my $39.5k after-tax dollars to purchase a $100 item, but pay about 8% more for sales tax.
The Fair Tax System would be a change to make taxes progressive. Richer people would have more money to spend, and their spending means more money to tax funds. In the current system, taxes are regressive because effective tax rates are lower for the rich compared to the poor. Social security and Medicare taxes are only imposed on about the first $100k of income reported on a W2. People making less than $100k will be paying the majority of this. Capital gains are currently capped to be taxed at no more than 15%. Rich people can have lots of assets and rely on primarily capital gains instead of defined income from a W2. Therefore they can be exempt from federal tax brackets as high as 35%, not to mention social security and Medicare taxes. Steve Jobs, founder of Apple, has an annual salary of $1 from Apple. He makes all his money from Apple via stock options, which when played right, are only taxes at 15% because of capital gains. None of that will go towards social security or Medicare.
The current system favors other people besides the super wealthy. Under the current tax system, people can claim deductions to offset taxable income such as interest paid on a mortgage. There are many other deductions to claim and are very helpful to those who take advantage of it. There will be no deductions under Fair Tax.
As it stands right now, I'm not ready to switch to Fair Tax. Even though I claim the standard deduction, I plan to have a mortgage sometime in the future to offset my taxable income, and I plan to take advantage of capital gains and hopefully rely on that as income more so than salaried income. I am also contributing the max to my Roth IRA. Since that money was already taxed and any earnings would be tax-free, under Fair Tax I would still have to pay the hiked up sales tax. However, Fair Tax would mean any income from tax-deferred accounts such as 401(k)s or traditional IRAs would be tax deferred indefinitely until spent on new goods or services.
All in all, Fair Tax is something we shouldn't worry about at this moment. John McCain is the leading front runner for the Republican Party with Mike Huckabee far behind. The nation is not willing to have a change so dramatic that even with it's intended benefits, the benefits may not be so easy to understand therefore the cons just stand out.
The Fair Tax system would get rid of the IRS, tax brackets, income taxes, social security taxes, Medicare taxes, capital gains taxes, and many other things. Instead, taxes will be applied on purchases of new goods and services.
For example, if I made $50k in a year, I would receive $50k in my pocket under Fair Tax, with none of that deducted for taxes. If I made that much in 2007 as a single filer in the current system, I would only receive $39.5k after deducting federal income tax, social security, and Medicare. That does not include deductions for state taxes.
When it comes down to purchases, Fair Tax impose a 30% sales tax, or 23% effective tax. Imagine a $100 jacket in today's prices costing $130 under Fair Tax. You can either look at it as $30 more than $100, which is 30%, or look at it as $30 of $130, which is 23%. Under the current system, I would have to use my $39.5k after-tax dollars to purchase a $100 item, but pay about 8% more for sales tax.
The Fair Tax System would be a change to make taxes progressive. Richer people would have more money to spend, and their spending means more money to tax funds. In the current system, taxes are regressive because effective tax rates are lower for the rich compared to the poor. Social security and Medicare taxes are only imposed on about the first $100k of income reported on a W2. People making less than $100k will be paying the majority of this. Capital gains are currently capped to be taxed at no more than 15%. Rich people can have lots of assets and rely on primarily capital gains instead of defined income from a W2. Therefore they can be exempt from federal tax brackets as high as 35%, not to mention social security and Medicare taxes. Steve Jobs, founder of Apple, has an annual salary of $1 from Apple. He makes all his money from Apple via stock options, which when played right, are only taxes at 15% because of capital gains. None of that will go towards social security or Medicare.
The current system favors other people besides the super wealthy. Under the current tax system, people can claim deductions to offset taxable income such as interest paid on a mortgage. There are many other deductions to claim and are very helpful to those who take advantage of it. There will be no deductions under Fair Tax.
As it stands right now, I'm not ready to switch to Fair Tax. Even though I claim the standard deduction, I plan to have a mortgage sometime in the future to offset my taxable income, and I plan to take advantage of capital gains and hopefully rely on that as income more so than salaried income. I am also contributing the max to my Roth IRA. Since that money was already taxed and any earnings would be tax-free, under Fair Tax I would still have to pay the hiked up sales tax. However, Fair Tax would mean any income from tax-deferred accounts such as 401(k)s or traditional IRAs would be tax deferred indefinitely until spent on new goods or services.
All in all, Fair Tax is something we shouldn't worry about at this moment. John McCain is the leading front runner for the Republican Party with Mike Huckabee far behind. The nation is not willing to have a change so dramatic that even with it's intended benefits, the benefits may not be so easy to understand therefore the cons just stand out.
Tuesday, February 5, 2008
Can TurboTax be wrong?
I have received everything I need to file my taxes - W2s, 1099-DIVs, 1099-INTs, 1099-Bs. I have entered in all my information into both TurboTax for the Web and TaxActOnline. Using TaxActOnline, I will owe more taxes compared to when I use TurboTax for the Web.
The discrepancy I noticed was the calculation of the sale of stock from ESPP (Employee Stock Purchase Plan). TaxActOnline calculates the amount the way I have read the calculation is suppossed to be, including the description of the TurboTax website itself. However, TurboTax for the Web follows the same description to calculation the net gain, but then subtracts any trading fees paid from that net gain. It does not make sense, because the trading fee was already subtracted from the total proceeds. TurboTax for the Web is deducting the amount twice when it should only be done once.
I am going to have to do more digging around to get this ESPP tax situation straigtened out before filling. At least I've got about 2 months to figure it out still.
The discrepancy I noticed was the calculation of the sale of stock from ESPP (Employee Stock Purchase Plan). TaxActOnline calculates the amount the way I have read the calculation is suppossed to be, including the description of the TurboTax website itself. However, TurboTax for the Web follows the same description to calculation the net gain, but then subtracts any trading fees paid from that net gain. It does not make sense, because the trading fee was already subtracted from the total proceeds. TurboTax for the Web is deducting the amount twice when it should only be done once.
I am going to have to do more digging around to get this ESPP tax situation straigtened out before filling. At least I've got about 2 months to figure it out still.
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