First, let me welcome you to the first post on the Personal Finance Blog. For more information about me and the site, please visit the About page accessible through the link in the menu at the of the page. Also, make sure you bookmark the site by pressing Ctrl + D or using the link on the left hand side of the page (the link only works in Internet Explorer).
Let’s jump right into the meat of this site. It is now mid-September, and it is time to start thinking about getting your financial house in order for the upcoming tax season and the coming year. One thing that should always be reviewed before the end of the year is your retirement planning, especially if you have a 401k or an IRA. Other things to consider is adjusting your health insurance, cafeteria plans, and other items that can only be changed during the so-called “open season”.
For now, let’s just consider the cafeteria plan, as the retirement stuff can usually be changed anytime. For those of you who may not know, a cafeteria plan is a plan offered by employers to cover things like child care, health and dental insurance premiums, and other health costs. Money is contributed to the plan by you every paycheck through automatic payroll deduction. Health and Dental insurance premiums are usually deducted immediately from the plan and sent on to the insurance company, along with the employer contribution (if any). Child care and other health costs money is covered by the amount contributed by you for those expenses. These funds must be projected by you at the beginning of each year.
The primary advantage of a cafeteria plan is tax savings. The amount contributed to a cafeteria plan is deducted from your gross earnings and is therefore contributed tax-free. When you file your taxes, the amount of salary you claim is your gross earnings minus the amount you contributed to the cafeteria plan (and any other up front items, like a 401k).
The tricky part of a cafeteria plan is deciding how much money you need to put in there. Any money that is contributed to a cafeteria plan must be used during that calendar year. If there is money left in the account at the end of the year, you lose it.
Currently, the IRS allows you to put up to $5000 per year in the plan to cover child-care expenses. If you live in a high cost-of-living area where child-care is quite expensive you may need to use all of this and then some, in which case choosing the amount to put in the account is a no-brainer. If your child-care costs something less than this, though, you must make sure that you don’t over-contribute. Additionally, if you are using a family member or an unlicensed day care provider, this will be of no help to you. The IRS requires a business number or a social security number for the provider in question. In these cases, it pays to carefully consider which scenario saves you more money: a lower cost provider or the tax benefits gained from using a licensed, higher cost provider.
Health care costs are tricky too, particularly if you are young and have no established record of how much you spend on a yearly basis for health-related costs. Over-the-counter medication, prescription co-pays, and doctor visit co-pays are a few of the health related items that cafeteria plan money can be used to cover. When claiming the money, you must provide documentation of the expenses in the form of receipts. These expenses can not be applied to the health care costs deduction on your taxes, which most people don’t qualify for anyway since it must exceed 8% of your AGI. If you have no established history, I suggest starting low with a figure like $500. If you do have an established history, then use the average of the last three years and throw in an extra amount to cover increased costs. The maximum contribution to a cafeteria plan for health care costs is currently $6,000 per year.
Other names for these types of accounts include Flex Benefit plans, flex spending accounts, health savings plans, and there are probably others. It is certainly worth your while to find out whether your employer has one of these plans. Check with your human resources department to first determine whether a plan is available and second to get the details on the plan. Since adjustments to the plans can only be done once a year in December or January (depends on the plan), you should start planning now to determine how much you will need to contribute next year.
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