NEW YORK (AP) ? Grumbling about taxes is a national preoccupation. Yet workers forgo thousands of dollars in tax savings every year.
The oversight happens despite the weeks-long open enrollment period companies give employees to make changes to their health insurance benefits.
Take for example health care flexible spending accounts, which let workers set aside tax-free wages for items such as insurance copays and supplies, such as bandages and sunscreen. A study by the benefits consulting firm Mercer last year found that less than a quarter of eligible workers open these accounts. And just 7 percent take advantage of similar accounts for dependent care, which can significantly offset the cost of day care for working parents.
But if a worker were to set aside the typical total maximum of $10,000 between the two accounts, the savings would amount to $2,500. That’s assuming a 25 percent tax rate.
So at a time when household budgets are under increasing pressure, don’t let another year pass without taking advantage of the tax benefits offered at work.
Here’s what you need to know about taxes and open enrollment:
Health Care Flexible Spending Accounts
The cost of health care goes far beyond insurance premiums; just think of all the co-pays for doctor visits and money spent on items such as aspirin and cold packs for arthritis.
To help offset such expenses, most large companies let you set aside up to $5,000 of pre-tax wages in a health care flexible spending account, or FSA.
Money that isn’t used by the end of the year is generally forfeited but don’t let that discourage you. To get a better handle on how much you might spend in the year ahead, review the list of eligible expenses provided by your plan administrator, which should be easy to find on its website. Aetna’s, for example, can be found at http://tinyurl.com/db9wdu .
A good rule of thumb is to ask whether the cost is for a specific medical issue or for overall health. If it’s for the latter ? such as gym fees or vitamin supplements ? it’s probably not covered.
Over-the-counter medications such as cough syrup and aspirin are a bit tricky. A change that went into effect last year requires workers to have prescriptions if they want their FSAs to cover those costs. The idea is to prevent abuse and maximize tax revenue for the government. If you’re concerned about whether you’ll have trouble getting prescriptions for OTC medications, talk to your doctor on your next visit.
“You want to think carefully about how much you’re setting aside,” said Jackie Perlman, a senior analyst with The Tax Institute at H&R Block. “Look at your expenses for the past year. Go talk to your dentist. Find out if you’re going to need a crown.”
The Internal Revenue Service doesn’t limit how much workers can set aside in health care flexible spending accounts, but most companies cap contributions at $5,000. Starting in 2013, however, a $2,500 cap will take effect under a rule that was passed as part of the health care overhaul.
The lower cap may not be a problem; the average annual contribution is $1,500, according to Mercer.
Dependent Care Accounts
Companies also offer dependent care flexible spending accounts, which can help offset costs for workers with young children or elderly parents.
The idea behind dependent care accounts is to help pay for care while you’re at work. That means that if you have a spouse, you both have to be working ? or looking for work ? to qualify. An exception is if one spouse is in school.
Keep in mind that these accounts aren’t intended to offer tax advantages to pay for an occasional babysitter for personal reasons.
“It’s not to hire the college student next door while you go to movies,” Perlman said.
Although fewer workers participate in dependent care FSAs, the average annual contribution among those that do is $3,100, according to Mercer. That’s likely because it’s far easier to predict care costs and exhaust savings. The current $5,000 cap on dependent care FSAs will stay in place and will not be affected by the new cap on health care FSAs.
Other Tax Savings
Open enrollment season is also a good time to review any other tax benefits your employer might offer.
The biggest work-related tax benefit for most is a 401(k) retirement plan. And starting next year, workers should note that the maximum pre-tax contribution will increase to $17,000, from $16, 500. Workers over 50 and older should note that they can also kick in an additional $5,500 to catch up on savings.
Separately, many employers also let workers use pre-tax earnings for transportation costs. For 2012, the maximum benefit for public transit passes will be $125 a month, unless Congress extends this year’s maximum of $240. The maximum for parking expenses is $240 a month. And unlike FSAs, this is a benefit workers don’t have to commit to for the year.
“It’s a very easy benefit to jump in and out of,” said Dan Corbett of WageWorks, which helps companies provide benefits. “If they go on vacation, they can cancel it for that month.”