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Tax Saving

Everyone who pays taxes is always looking for a way to increase their tax savings. Tax savings can come in the form of deductions. Deductions may come in many forms, and vary on if the entity is an individual or a business. There are also pre-tax savings accounts that many employees are able to take advantage of but often have questions beforehand and after. Below are questions that people have asked the Experts in regards to tax savings.

A cafeteria plan is a pre-tax savings account, how does it work?

A cafeteria plan is a pre-tax savings account that most commonly an employee can get through their employer. The money that is put into that account is subjected to the use-it-or-lose-it rule, which means that an individual must use all of the money in the pre-tax savings account before the end of the year or the money in the plan will be forfeited. Some plans, at the employer’s discretion, have a grace period that follows the plans end of year. The grace period must apply to all employees, not just a select few. Under the grace period the qualified benefit expenses that have been incurred will be reimbursed or paid from the remainder of monies at the end of the plan year. However it must be noted that a grace period cannot extend past the 15th day of the third month that follows the plan year. If the provider of the cafeteria pre-tax savings account makes it extremely hard for the employee to find the appropriate forms to fill out, and the employee forfeits the money in the pre-tax savings account due to this, it would be wise to contact an attorney to help the individual.

Can a mortgage generate tax savings?

In many cases, a mortgage in and of itself is not set up to generate tax savings, a mortgage is considered to be an expense. Tax deductions can help with tax savings, but a mortgage is not considered to be a tax deduction. The interest paid on a mortgage is considered to be a tax deduction; whereas the payments made on a mortgage and any escrow are not. The best way to incur tax savings is through the use of deductions, if an individual has more deductions that put them past the standard deduction then they will have their taxable income decreased. It should also be noted that the tax savings that can occur will depend upon the individual’s tax bracket.

If an individual uses the interest from a trust account to make improvements on their home will this generate tax savings?

In most situations, if an individual uses the interest that they receive from a trust account to make improvements on their home, even if they did the improvements on their own, the improvements will not generate tax savings. The improvements made upon the house will increase the house’s cost basis, and will lower the capital gain when the individual sells the house. So if an individual is planning on using the interest from their trust to improve their home in an effort to increase their tax savings, the effort will be in vain.

If an individual has a health savings account where is this included on a W-2?

Since the IRS has classified health savings account contributions made by employees into cafeteria plans as contributions by employers the amount will be found on the W-2 in box 12 with the code W. As such the employees that have the pre-tax savings cafeteria plan are unable to deduct those amounts found in the box 12-W on their federal income tax return as health savings account contributions or medical expenses.

Many companies and employers offer to their employee’s health savings accounts that may also be known as cafeteria plans, these plans are pre-tax savings accounts. The use of interest from an individual’s trust to make home improvements does not generate tax savings. Nor does a mortgage generate tax savings; the only part of a mortgage that is able to be used as a deduction is the interest. Any questions regarding tax savings can be asked of the Experts.
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