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 |
- 10,900
|
- 10,900
|
| Exemptions |
- 14,000
|
- 14,000
|
| Sub-Total |
$20,100
|
$18,100
|
| Federal income taxes* |
- 2,209
|
- 1,909
|
| Social Security taxes |
- 3,443
|
- 3,290
|
| After-tax payment for expenses |
- 2,000
|
- 0
|
| Take-home pay |
$37,349
|
$37,802
|
Total tax savings from using pre-tax dollars is $453.
*Based on 2008 tax laws. Assumes you are married, file jointly with your spouse, take the standard deductions and four exemptions.