It’s widely held that the Taxman is Public Enemy #1. It seems that every time we turn around there’s another tax to pay. However, the IRS is not always the “The Big Bad Wolf”. Found in the U.S. tax code are many sections that have to do with exemptions, deductions and credits, available to all, not just the “rich” (as is also widely believed.) And these run the gambit from help with college expenses to medical procedures to retirement.
The 401(k) plan is the most well known of these. This section of the tax code describes an Employer sponsored plan that will, with employee participation, allow money to be saved for retirement, from “gross” wages, and matched with company dollars. These plans have taken the place of defined pension plans, the difference being, if a worker chooses not to participate, no funds will be available from the company. Pensions, on the other hand, provided an income in retirement that a worker earned over several years of employment.
Like the 401(k), much is the same with the 403(b) plan. This one, however, specifically targets educators, hospital workers, municipal employees, etc. Both the 403(b) and the 401(k) plans can be considered tax deferred accounts, as the taxes would be due on all monies (principal & earnings) at time of withdrawal.
Section 529 deals with the high cost of college. This College Savings Plan is terrific for families with college bound children. Most States have plans with basic rules for enrollment and each carries specific tax advantages for Saving the money and Spending for college. One such plan allows for a couple (married filing jointly) to deduct up to $ 10,000 from taxation, for saving in the plan in a given tax year. Furthermore, when spent on qualified college costs, a State tax credit may be available up to $400 and a federal deduction of $4000 for tuition and fees. It’s conceivable that in a single tax year, saving and spending in this plan could yield a savings of $1900 (assuming a State tax rate of 7% and Federal tax rate of 20%)….who wouldn’t do this??? And, oh by the way, any money (interest) earned in the account is considered Tax Free if, of course, used for colleges expenses. A good deal??? You bet it is!!!
Then there is the 125 plan, also known as the Flexible Spending Plan. Here, an employee can set aside money (before) tax, throughout the year, in his company’s 125 plan, to be spent on certain upcoming and known expenses like elective surgery or braces for the kids’ teeth…all with gross earnings; saving possibly hundreds of dollars in taxes. Not all companies have such a plan available so check with your employer.
This is merely an overview of some tax advantages available to taxpayers. The internet is of course a good source of additional information as well as the IRS (website or publications)
In conclusion, these plans, as well as credits like Head of Household, Earned Income, Lifetime Learning and others are available to all of us. Take a look at your own family situation; odds are you too may find a tax break tailor made for you.
…………Cents Maker……….