Guest Blogger: Adam Watson, Watson & Associates, PA, CPAs
It may be hard to believe, but 2011 is already half over. By now, most people have filed their taxes for 2010, and many of those people won’t think about taxes again until early next year. However, now is the perfect time to review your situation for 2011, and make any adjustments necessary to maximize your tax savings. I’d like to discuss a few general planning tips to consider. This first blog post will focus on employees. I’ll touch on planning tips for self employed individuals in a future post.
The first and most basic thing to look at is your withholding. If you owed money, then you need to update your W-4. If you’re married and your spouse works, don’t forget to complete the two-earner worksheet. The IRS offers a handy tool to evaluate your withholding. It’s located HERE.
Be sure you understand what options your employer offers. Is there a cafeteria plan? Setting aside money pre-tax for dependent care or for medical expenses is usually a good tax savings. It not only reduces your taxable income, but the money in a cafeteria plan is also exempted from Social Security and Medicare taxes as well. Some people are afraid to use flexible spending accounts for medical expenses because of the “use it or lose it” provisions. But even a small amount put away will still lower your tax bill. You can see how quickly you use the funds over the course of the year and adjust as needed.
Does your employer provide an expense allowance? If so, you might want to discuss how this is structured. A flat allowance (such as $100/month for gas) is generally taxable, and is included in your income as salary. However, if your employer has an “accountable” plan, and only reimburses what you turn in receipts for, then the payment is deductible to your employer and tax free to you. Expense reimbursements also save both employer and employee payroll taxes. If you’ve been receiving a regular allowance, it may be worth discussing with your employer to change it into an expense reimbursement model that will save both of you taxes.
Does your employer offer a retirement plan? If so, is there a company match? For many smaller businesses, the traditional 401(k) is just too cost prohibitive. The most popular small business retirement plan is a SIMPLE IRA. What many employees don’t realize is the company match in a SIMPLE IRA is dependent upon your own contributions into the SIMPLE plan. While employers have some leeway in how they fund their match, they generally must match your contribution dollar for dollar up to 3% of your total salary. In addition, SIMPLE IRAs are vested immediately- no matter how long your length of service is with your employer, the money is 100% yours as soon as the contribution is made. If you’re not at least contributing enough to maximize your company match dollars, then you’re leaving money on the table!
These are just a few simple steps to review with your employer to make sure you’re taking full advantage of any tax benefits available. In future entries we’ll touch on some other tax savings strategies. Have any general tax questions? Post them and we’ll answer as many as possible in a future post.
Adam Watson is a shareholder with Watson & Associates, PA, CPAs. He has been in public practice for 10 years, focusing on personal, corporate, and non-profit tax planning and preparation as well as business consulting. He is a graduate of Leadership Tallahassee Class 27, is currently serving as a KCCI Community Catalyst, and also serves as Treasurer on the Boards of Big Brothers Big Sisters of the Big Bend and Capital Soccer Association. He can be reached at awatson@mywatsoncpa.com.
Disclaimer:
The information contained in this Blog is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The application and impact of laws can vary widely based on the specific facts involved. Accordingly, the information on this Blog is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice or services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser.
