It’s never too early for you to start thinking about your tax preparation for the next year! Smart people are always looking for ways they can save money on their taxes, and even with the big changes that came with the Tax Cuts and Jobs Act this past year, there are still plenty of opportunities for you to see some savings.
There are several types of savings and spending accounts that will give you some tax savings that really add up over time: 401(k)s, flexible spending accounts (FSAs) and health savings accounts (HSAs). Read on for a closer look at each of these, and contact an accounting firm in Union City, NJ if you’d like more information about setting up one of these accounts.
401(k)s are a type of retirement savings plan sponsored by the employer that features tax-deferred contributions, meaning the money you put in isn’t taxed until you take out your withdrawals later on. These accounts are beneficial not only because employers chip in funds, but also because they have higher contribution limits than IRAs. There is also a Saver’s Credit associated with contributing to a 401(k).
All contributions to 401(k)s are made through payroll deductions or through your employer. Your W-2 will list your total contributions under box 12. If you attempt to withdraw funds before you turn 59.5 years old, there will be a 10 percent penalty on those funds in addition to the taxes you have to pay on them.
The two main categories of FSAs are healthcare and dependent care FSAs. They have different annual contribution limits—you can put more into a dependent care FSA each year. Contributions to these accounts can be made by both you and your employer, but the dollar limit will apply to all combined contributions.
The drawback of an FSA is that it’s a “use it or lose it” account, meaning you lose the money at the end of the year if there are still funds left over. However, you may be able to benefit from a short grace period to spend the remaining funds, depending on whether or not your employer agrees to offer one. You do not have to report FSAs on your tax return
You must have a high-deductible health plan to have an HSA. Contributions can be made by both employer and employee, and like with FSAs, the contribution limit applies to all combined contributions
Unlike FSAs, you can carry over the balance of your HSA from year to year, and it will continue to grow tax-deferred. You can invest HSA money, as long as you use that money to pay for qualifying medical expenses.
You will need to report your HSA contributions on your taxes with Form 8889. Your HSA administrator will also give you a Form 1099-SA, which lists all withdrawals for the year. Any funds used for non-qualified expenses will result in taxes on that amount and a 20 percent penalty for people younger than 65.
For more information about tax savings through these accounts, contact Kedean’s Generation today about tax preparation in Union City, NJ.
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