Is taking advantage of pre-tax benefits beneficial if you normally don't owe taxes at the end of the year after deductions?
I guess I am trying to understand pre-tax benefits when they say it reduces your taxable income. I got a new job where I have to pay for parking and the cost for parking will amount to about 1300.00 a year. My job offers for me to pay for the parking using pre-tax dollars, but I normally get my tax liability reduced a lot with deductions and what not. Would it be beneficial to take advantage of this benefit?
- Coffee DrinkerLv 711 months agoFavorite Answer
Yes, you should do it:
1. Flex Spending Accounts (which is what they're offering) come out before computing FICA taxes. That's 6.2% social security and 1.45% for medicare tax (total of 7.65% flat rate tax). So even if your federal income tax is already $0, this will save you $99 per year just from FICA taxes.
2. There is a difference between not owing tax and having $0 tax liability. For example if your tax liability is $2000 and you paid $2500 through paycheck withholding, you would not owe any tax and would get a $500 refund. But you still paid the government $2000 that year. If you could claim another deduction and reduce your tax liability to $1800 you would increase your refund to $700, effectively meaning there's an extra $200 in your pocket instead of paying it to the IRS.
So just because you don't owe tax when you file your return doesn't mean there's no room to reduce your tax liability and pay less money to the government.
3. Even if you have $0 tax liability and you're getting ALL of your withholding refunded, you could still improve your circumstances through more deductions. For example a single parent with 3 children earning $40k would get about $8000 of refundable tax credits. The first $2300 of those credits would be used to pay their pre-credit tax bill, leaving them with just over $5,500 of free money being refunded (on top of any withholding they paid). If that same parent could deduct an extra $5k and reduce their income to $35k, their pre-credit tax liability would drop to under $1700 AND their credits would be a little bigger so they would get over $7000.
So in this scenario someone who already has $0 tax liability and is getting ALL their withholding back plus free money, can still improve their situation and get more free money back (meaning a larger refundable credit).
4. There are other areas of the tax code where lower income will help you. for example if you are low in come and put money in a retirement account there's a credit you can claim. Reducing your income with this FSA account could help you qualify for that credit or qualify for a larger %.
So the bottom line is that your WORST case scenario is that you get no benefit (and no penalty) on your federal taxes but you still save about $100 on FICA taxes. Your best case you might save $300-$400 or more. This is a no-brainier. If you know you're going to have to fork over $1300, then put $1300 in that transportation FSA account and use it to pay the parking fees.
- 11 months ago
Yes, because you still would have a lower tax burden.
- Anonymous11 months ago
It is always worth taking any pre-tax benefits that you can during any year even when you expect to have no taxable income.
Consider this - what if you change jobs or get a very nice raise and you income becomes high enough to not be reduced to no taxable income. If you have taken every other benefit possible, you won't regret not taking it when circumstances made it beneficial to have.
- curtisports2Lv 711 months ago
While it might not benefit you some years, it won't hurt you.
I note you said you get your tax liability reduced a lot through deductions. If your tax liability is not being reduced to ZERO, then having that parking fee taken pre-tax IS benefiting you.
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- AmyLv 711 months ago
There's no harm in taking the parking benefit. It will either reduce your tax or do nothing because your tax is already zero.
In that case your choice is between taking this deduction or not taking it.
In contrast, where you have a choice such as whether to open a traditional or Roth IRA, you should choose to count income as taxable now instead of in a future year when your tax rate will be higher.
- EricLv 611 months ago
if they allow it, i would take it.
- EvaLv 711 months ago
Any pre-tax benefit is worth taking. It lowers your taxable income.
- Max HooplaLv 711 months ago
Unless you get your liability reduced to zero BEFORE subtracting withholding then paying with pre-tax dollars is a winner
- Anonymous11 months ago
Yes, take advantage of the benefit.
You can't deduct parking at work.