7 Essential Tips for Employees to Reduce Their Tax Liability

It’s not only the large corporations that can structure their assets and earnings in ways to lower their tax liability. There are sound and legal ways that employees, with the help of their employers, can structure their wages to drastically lower their tax footprint and put real dollars back in their wallets now.

1. Medical Reimbursement Account


If your employer offers a medical reimbursement account or flex plan, be aggressive. These plans let you divert part of your salary to a medical savings account, where through an ATM card, you can access the funds to pay any medical expense. These expenses are not limited to physician or hospital visits. Since most of these plans have standard insurance kick in after a deductable is reached, the money in these accounts can be used for any medical expense. This means you can use these plans for dental, eye, new glasses, and prescriptions as well. You will avoid both income and Social Security Tax on the money you divert into the medical savings account. This can save you 20-35% or more compared to spending after-tax money. In 2013, the maximum you can contribute to a flex plan is $2,500.

2. Pay Child Care with Pre-Tax Dollars


If you are facing an annual child day care bill of $5,000 then it’s going to take about $7,500 in pre-tax earnings to pay the bill. If you use the child-care reimbursement account at work to pay these bills, then you are spending pre-tax earnings and thus saving $2,500 in the process. You will avoid both income and Social Security Tax on the money you divert into the child-care reimbursement account. Talk to your employer to see if they offer a child-care reimbursement plan.

3. Improve Yourself and Ask Your Boss to Pay for It


Companies can offer employees up to $5,250 of educational assistance each year and it is tax free. Your employer will pay the bills but that amount will not show up as part of your salary on your W-2. The courses do not have to be job related and all levels of education, even graduate courses qualify.


4. Teacher’s Aide, Watch the Little Expenses


Keep receipts for what you spend out of pocket for books, pencils, paper, and other classroom supplies. You can deduct up to $250 for these out-of-pocket expenses and can do so even if you do not itemize.

5. Pay Back a 401(k) Loan before Leaving the Job


If you leave your present job with an outstanding 401(k) loan, that amount will be considered a distribution that will be taxed at your top bracket. If you are younger than 55 when you leave, there will also be a 10% penalty assessed as well.

6. Keep Good Records of All Expenses Associated with that New Job Hunt


If you are one of the millions of Americans who are unemployed or under employed, keep track of all of your job-hunting expenses. As long as you are looking for a new position in the same line of work (your first job doesn’t qualify), you can deduct job-hunting costs, including travel expenses, such as the cost of food, lodging, and transportation. Such costs associated with job-hunting must not exceed 2% of your adjusted gross income.

7. Keep Track of the Cost to Move to that New Job


If that new job you just landed is more than 50 miles farther from your old home than your old job was, you can deduct the cost of the move. This can be deducted even if you don’t itemize on your return. If it’s your first job, the mileage test is met if the new job is at least 50 miles away from your old home. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 24 cents per mile plus parking and tolls.

Remember, it’s not only the employers but the employees that can take advantage of the tax laws and structure their salaries to take full advantage of the tax code. At garvey & garvey, LLC CPAs, we can easily assist business owners and employees with establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.