Thursday, January 11, 2007

Tax Savings

I got my first paycheck of the year today, which means it's my first paycheck adjusted for flexible spending and 401(k) witholdings.

Previously, my take-home pay was $889. Now, after witholding $80 (7%) for my 401(k) contribution and $35 for my travel FSA, it's coming in at $806. That's $115 on which I don't pay taxes, and thus, about $20 in taxes saved every two weeks, for a projected yearly savings of $520. Not bad. I'll take it.


Anonymous said...

Can you please explain this a little more? How do withholdings work?

English Major said...

Hey anonymous: Sure thing; I know I didn't do a very good job on this one.

So far as I know, there are three major sources of witholding:
1) Taxes. The level of your tax witholding is determined by the form you fill out with your HR person when you start work.
2) Retirement contributions. You set this level yourself, by filling out forms with HR.
3) Flexible spending accounts. These are benefits provided by many companies that allow you to set aside pretax money for specific purposes (mostly your work-related travel and all medical expenses). This mostly works in one of two ways: your company gives you a debit card earmarked for the purposes for which you've witheld, or you pay for them yourself initially and then get reimbursed. My company does the latter, unfortunately.

Now here's the thing: all non-tax witholding is taken out of your check before taxes. That means that you don't pay taxes on that money, and thus, that money that to you is worth, say $120 only presents a loss of about $90 from your check.

It's cool, actually, and learning to make the most of it can free up some money (the tax savings) to do other things.

Zachary said...

FSA's are great. I just opened a health FSA through my employer and will save around $250 in taxes this year. The greatest part is that they have a paperless reimbursement system so I won't have to file a claim and wait. After I buy a prescription or see my doctor it will be automatically debited to my checking account.