Every year, salaried employees miss out on opportunities to improve their tax situation. As a result, they lose thousands of dollars in federal and state tax overpayments.
Salaried workers are employees who often work in supervisory, managerial or professional positions. They work on an annual basis, and they are not paid an hourly rate. They are generally considered to be in the higher ranks of company management.
Like all types of workers, salaried workers can reduce their tax obligations by reducing their adjusted gross income in several ways, including taking all available tax deductions and tax credits.
However, there are some key ways to lower taxes that are often overlooked. Here are three common mistakes salaried workers make that prevent them from decreasing their tax liabilities:
FAILING TO MAXIMIZE NONCASH CHARITABLE CONTRIBUTION DEDUCTIONS
In the new book “How To Stick It To The IRS: Confessions From A Former Insider,” former IRS agent and certified public accountant Sherry Peel Jackson writes that many W-2 wage earners don’t take full advantage of the noncash charitable contribution deductions as they should.
Instead, workers generally only take a $500 deduction. Why? Because Schedule A says if they want a larger deduction, they should complete Form 8283. A lot of eligible people are afraid of completing that form and as a result, a salaried worker can lose thousands of dollars in deductions each year, according to Jackson.
OVERLOOKING TAX-FRIENDLY EMPLOYER BENEFITS
Your company’s employee benefits package should be viewed in two ways: Both as a way to get great benefits and as an opportunity to increase pretax payments, since paying any portion of these benefits reduces overall taxable income.
When comparing prospective employers, it’s important to compare employee benefits plans, said Michael Eckstein, tax accountant with Michael Eckstein Tax Services in Huntington, N.Y.
“These plans often offer tax-advantaged benefits, but some benefits may require a pretax contribution,” he said. “If you’re fortunate enough to work for a company with a comprehensive employee benefits package, they’re a great way to pay certain expenses while keeping overall taxable income lower.”
Benefits that can reduce your tax burden include:
–Transportation. These benefits include everything from transit passes to biking reimbursements. Depending on the plan, these benefits can lower your taxable income.
–Group insurance. Many competitive employers provide a combination of group health, life and long-term disability insurance. These benefits might require a pretax contribution on your part, but such contributions lower your taxable income.
–Flexible spending accounts, or FSAs. These accounts can be used for day care, health services, medicine and prescriptions that are not covered by your health insurance or otherwise reimbursed. Again, you contribute these funds on a pretax basis, which can reduce your tax bill.
The amount of money you can contribute to an FSA is now capped at $2,550 annually. In most FSA accounts, the balance does not roll over at the end of the year — you use it or lose it. Even those that do allow rollovers typically cap the amount at $500. So, it’s important to properly calculate how much you should contribute to your FSA, or you will be throwing money away.
SKIPPING RETIREMENT ACCOUNT CONTRIBUTIONS
Contributing to an employer-sponsored retirement account is every worker’s no-brainer deduction.
“One of the biggest tax mistakes made by average salaried workers is failing to take full advantage of the many valuable retirement tax incentives — or worse, not participating at all in the plan,” said Benjamin L. Grosz, an attorney who works with clients on tax planning at Ivins, Phillips & Barker in Washington, D.C.
If your employer offers a 401k and 403(b) retirement plan, you will get the biggest tax break if you participate to the maximum amount allowed. For both 2015 and 2016, the maximum allowed contribution is $18,000 per worker. You can contribute an extra $6,000 in “catch-up” contributions if you are 50 or older.
But, if your employer does not offer a workplace retirement plan, consider contributing to a traditional or Roth IRA. The maximum contribution amounts in both 2015 and 2016 are $5,500 ($6,500 if you are 50 or older).
Some salaried workers do not make big wages. If that’s the case, be sure to take full advantage of the Retirement Savings Contributions Credit, or what the IRS calls a “Saver’s Credit.” If you qualify, you can take a tax credit for contributing to your IRA or employer-sponsored retirement plan. The IRS has income limits on its website.
If your company has a pension plan, you can also contribute to a Roth or traditional IRA within certain restrictions, including whether your spouse is working and your income level. For more information on these contribution limits, visit the IRS’ page on IRA deduction limits.
Chuck Epstein writes for GOBankingRates.com (), a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.
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