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Financial Q&A: Tips to Pay Less Tax or Get a Bigger Refund

Laura answers tax questions from readers, listeners, followers, and group members that will help you understand how to pay less tax, defer it, or to boost your tax refund and save more money every year.

By
Laura Adams, MBA
11-minute read
Episode #434

Question #6: Anita says, “I’ve been contributing to a flexible spending arrangement (FSA) for years and am starting on a high deductible heath plan with an HSA. Is it true that contributions to these types of accounts reduce your Social Security earnings for the year and therefore your benefits in retirement?”

Answer:

Different types of deductions employers take from your paycheck on a pre-tax basis are handled in different ways. Some reduce all of your taxes, which include:

  • Federal income tax 
  • State income tax 
  • Social Security tax 
  • Medicare tax

And some reduce your federal and state income taxes only. The most common payroll deductions are for 401k contributions. They reduce your income taxes only, which means you still have to pay Social Security and Medicare taxes on your gross earnings.

By the way, Social Security and Medicare taxes are collectively known as FICA (Federal Insurance Contributions Act) taxes and are split 50-50 between employers and employees.

Anita is correct in saying that deductions from your paycheck for FSA or HSA contributions are generally not subject to any payroll taxes. That means you save money on taxes, including Social Security and Medicare.

However, FSA and HSA contributions also lower the earnings that are reported to the Social Security Administration for purposes of calculating your future retirement payment. That means your future Social Security benefits may be slightly reduced if you participate in an FSA or an HSA.

While FSA contributions are always made through employer payroll deductions, you can contribute to an HSA on your own and then take a deduction for your total annual contributions when you file your taxes. That’s the best way to handle HSA contributions so you continue to pay into Social Security. However, that’s not an option when you participate in an FSA.

Bonus Question:  Twitter follower @teeairawr says, “A good topic for your podcast would be tips on how to maximize your tax refund.”

Answer:

Fortunately, there are many ways to cut your taxes so you pay less or get a bigger tax refund.

One is to maximize your tax deductions, which reduces your taxable income and therefore the tax you have to pay. Get familiar with the complete list of deductions on Schedule A. They include medical expenses, having a home office, home mortgage interest, and making charitable donations.

Another tip to pay less tax is to defer or delay it when possible. You can use traditional retirement accounts (such as a traditional IRA or 401k) to defer tax on contributions and earnings in the account until some time in the future.

So make a goal to increase your retirement savings every year. Also, don’t forget that if you’re married and don’t work, you can still have a spousal IRA if you file taxes jointly.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.