You save federal income taxes and, in most states, state income taxes on the amount of your pre-tax contributions. Depending on your income, you may also save Social Security taxes.
Directing money to the Plan reduces your taxable income, which reduces the amount of tax you owe for:
- Federal income taxes,
- State income taxes (in most states),
- Local income taxes (in most locations), and
- Social Security.
If you earn less than the maximum Social Security wage base, plan contributions reduce the amount of pay subject to Social Security taxes. Participating in this Plan could lower your future Social Security benefits. Generally, the Plan's effect on Social Security benefits will be minimal.
Examples of tax savings using the Plan
To help you understand how you can save tax dollars with the Plan, consider the following examples. For purposes of these examples, we will assume:
- You and your spouse earn $60,000 a year,
- You pay 22.65% in taxes (15% federal income taxes and 7.65% Social Security taxes),
- No state or local taxes are calculated,
- You have two children, and
- Your total monthly contributions for coverage are $300.
Example 1 — Pre-Tax Contributions for Medical, Dental and Vision Plan Coverage:
In addition to the assumptions shown above, we will also assume that you pay $300 for medical, dental and vision plan coverage each month of the calendar year for a total of $3,600.
Now, let us compare the results if your contributions are deducted from your pay on a pre-tax basis or after-tax basis.
|If You Remain Enrolled in Pre-Tax for Medical/Dental/Vision Plan Contributions||If You Opt Out of Pre-Tax for Medical/Dental/Vision Plan Contributions|
|Gross annual pay||$ 60,000.00||$ 60,000.00|
|Less your pre-tax contributions||- 3,600.00||- 0.00|
|Balance||$ 56,400.00||$ 60,000.00|
|Less taxes (22.65%)||- 12,774.60||- 13,590.00|
|Less your after-tax contributions||- 0.00||- 3,600.00|
|Your take-home pay||$ 43,625.40||$ 42,810.00|
Your take-home pay increases by $815.40 during this period simply by paying your medical, dental and vision plan contributions on a pre-tax basis.
Example 2 — HCFSA Contributions:
The following example illustrates the concept of saving taxes through the use of the Health Care Flexible Spending Account. In this example, we will assume that you have tax rate of 22.65% and eligible, unreimbursed health care expenses of $2,000 for the coming year.
Here is the calculation:
|If You Elect the HCFSA||If You Do Not Elect the HCFSA|
|Gross annual pay||$ 60,000.00||$ 60,000.00|
|Less your pre-tax flexible spending contributions||- 2,000.00||- 0.00|
|Balance||$ 58,000.00||$ 60,000.00|
|Less taxes (22.65%)||- 13,137.00||- 13,590.00|
|Less your after-tax contributions||- 0.00||- 2,000.00|
|Your take-home pay||$ 44,863.00||$ 44,410.00|
Your take-home pay increases by $453 using the spending account.
However, if you pay medical, dental and vision contributions on a pre-tax basis and contribute to the HCFSA, your take-home pay increases by $1,268.40 for the year.
Example 3 — DCFSA Contributions:
Now, consider an example using the DCFSA. Before electing to participate in the DCFSA, you should consider claiming your dependent care expenses under the dependent care tax credit on your federal income tax return. Your personal financial and tax situation will determine which alternative is best for you.
In addition to the assumptions shown at the beginning of these examples, we will also assume that you have eligible dependent care expenses of $5,000 for your two children.
If you do not use the DCFSA, you may use the federal tax credit on your income tax return. The current tax credit is an amount equal to a percentage of your dependent care expenses, limited to $3,000 for one dependent or $6,000 for two or more dependents. The highest percentage is 35% decreasing to 20% with increasing income. In this example, you would have a tax credit of $1,000 - 20% of $5,000.
|If You Use the DCFSA||If You Do Not Use the DCFSA or the Tax Credit||If You Use the Tax Credit|
|Gross annual pay||$ 60,000.00||$ 60,000.00||$ 60,000.00|
|Less your pre-tax flexible spending contributions||-$ 5,000.00||- 0||- 0|
|Balance||$ 55,000.00||$ 60,000.00||$ 60,000.00|
|Less taxes (22.65%)||- $ 12,457.00||- 13,590.00||-$ 13,590.00|
|Less your after-tax contributions||- 0||- 5,000.00||- 5,000.00|
|Plus tax credit||+ 0||+ 0||+$ 1,000.00|
|Your take-home pay||$ 42,542.50||$ 41,410.00||$ 42,410.00|
Your take-home pay increases by $132.50 by using the DCFSA compared to using the tax credit only.
However, if you participate in all three parts of the Plan (paying contributions on a pre-tax basis, contributing to the HCFSA and contributing to the DCFSA), your take-home pay increases $1,400.90 for the year.
These examples are illustrations only. Taxes are a personal matter and may vary a great deal depending on your situation. Consult with your personal tax advisor if you have questions or concerns about how the Plan may save taxes for you.