If you're like most Americans, you're always looking for ways to hand over less of your hard-earned income to Uncle Sam each April. Although contributing to pre-tax retirement accounts and college savings accounts can save you money, one of the quickest and simplest ways to increase your post-tax income is to take advantage of deductions that are taken from your paycheck before FICA taxes are withheld. These taxes fund programs like Medicare and Social Security Disability and retirement benefits, and can take a hefty chunk of your paycheck -- 7.65 percent of your gross income if you work as a W2 employee, or up to 15.3 percent of your gross income if you're self-employed. Read on to learn more about FICA-advantaged deductions that may be available to help reduce your taxable income.
Contributions to a Health Savings Account (HSA)
If your employer offers a high deductible health insurance plan (HDHP), you should be able to contribute up to $3,350 per year (for individual coverage) or $6,650 per year for family coverage to your HSA. These are both "above the line" deductions (avoiding both federal and state income tax on all contributions) and FICA-free deductions. And unlike 401(k)s and other pre-tax savings accounts, HSA contributions continue to be tax-free as long as you spend these funds on qualified medical expenses.
Health and Life Insurance Premiums
Whether or not you're eligible for an HSA, any funds paid toward health or life insurance premiums will be both FICA- and federal tax-free. Although paying high insurance premiums can strain the family budget, these payments help you avoid a major hit at tax time. In addition, life insurance funds paid out after your death will be tax-free to your beneficiaries.
When might you want to avoid FICA-free deductions?
Although being able to regain 7 to 15 percent of a portion of your gross income can be tempting, if you're nearing retirement age, you may want to limit the amount of FICA-free deductions you take. Each year, your employer reports your Social Security and Medicare taxed earnings to the Social Security Administration -- and HSA contributions, health insurance premiums, and life insurance premiums are not included in this total.
If you're nearing the maximum income for FICA taxation, you may want to go ahead and hit this maximum to increase your retirement income at age 67. Even if your income is far below the maximum, you're often better off "increasing" your income by a few thousand dollars than saving a few hundred on taxes. For more information, contact a company like RJ. Garner CPA & Associates, PLC.