The tax code has plenty of ways to reduce your taxable income, and many take place on your paycheck. If you haven’t already done so, now is a great time to conduct a thorough review of your paystub. Here are some tips:
Review insurance withholdings. Many employers adjust the amount you contribute for your insurance at the start of each year. Check to ensure the proper amount is being withheld. This includes medical, dental, short-term disability and long-term disability. Every extra dollar hits your pocketbook!
Action: Compare the withholding amount with your employer documentation. Double check whether the dollars withheld are pre-tax or after tax. Most of these benefits should be pre-tax.
Check elective pre-tax benefits. These elective benefits typically include Health Savings Account (HSA) pre-tax contributions if you are in a qualified high deductible health plan or an FSA contribution if you are in this pre-tax health benefit. Remember that there are annual contribution limits, so double check you are taking full advantage of this tax benefit.
Action: Correct any errors as soon as possible with your employer and maximize your contributions to get your full tax benefit, but be careful with FSA contributions as part of the balance in this account does not carry over into the next year like HSA contributions.
Retirement Plans. Review to ensure contributions for employer-provided retirement plans are properly noted. If there is an employer contribution to your plan, make sure this is noted and properly calculated as well.
Action: If your employer is making a contribution to your plan, ensure you are maximizing this tax-deferred benefit.
Update your withholdings. Determine if enough is being withheld for Federal and State tax purposes. File a new W-4 with your employer if you need to adjust how much is being withheld for these taxes.
Action: Cost of living adjustments made by the IRS are impacting the tax rate being applied to your income. This is because the tax brackets are expanding while tax rates are remaining unchanged. Either use the new IRS withholding estimator (not for the faint of heart) or look at last year’s tax return and make adjustments accordingly.
Your paycheck is often one of the best sources of information to figure out how you can reduce your tax obligation. So keep it on your radar and come back to it for a quick review a few times during the year.