How Can It Reduce Your Taxes?
Spending accounts reduce your taxes by reducing your taxable income. Using these pre-tax accounts can make a significant difference in your take-home pay.
Example #1
The chart below illustrates what would happen if your annual pay is $45,000 and you have to pay $2,000 in health or dependent care expenses not covered by any other benefit plan.
| Example | After-tax (without account) | Pre-tax (with account) |
|---|---|---|
| Annual pay | $45,000 | $45,000 |
| Pre-tax contribution used for expenses | 0 | 2,000 |
| Sub-Total | $45,000 | $43,000 |
| Standard Deduction | - 9,700 | - 9,700 |
| Exemptions | - 12,400 | - 12,400 |
| Sub-Total | $22,900 | $20,900 |
| Federal income taxes* | - 2,716 | - 2,416 |
| Social Security taxes | - 3,443 | - 3,290 |
| After-tax payment for expenses | - 2,000 | - 0 |
| Take-home pay | $36,841 | $37,294 |
Total tax savings from using pre-tax dollars is $453.
*Based on 2004 tax laws. Assumes you are married, file jointly with your spouse, take the standard deductions and four exemptions.