How Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) factor into your W-4:
Health Savings Account (HSA) Contributions and Your W-4
- How it works: HSA contributions, when made through your employer's payroll (via a "cafeteria plan" or Section 125 plan), are typically deducted from your pay before federal income tax, Social Security, and Medicare taxes (FICA) are calculated. This means your taxable income for withholding purposes is already reduced.
- W-4 Impact: Because these contributions are already excluded from your taxable wages before your W-2 is even generated, you generally do not need to specifically enter these deductions on your W-4. Your employer's payroll system should automatically account for this pre-tax reduction when calculating your withholding.
- Exception (less common): If you make HSA contributions outside of your employer's payroll (e.g., directly to an HSA provider from your bank account), these are tax-deductible when you file your tax return (on Form 1040, Schedule 1). In this specific case, you could account for these additional deductions on Step 4(b) of the W-4 ("Deductions") to reduce your withholding. However, for most people contributing through their employer, it's already handled.
Flexible Spending Account (FSA) Contributions and Your W-4
- How it works: Similar to HSAs, contributions to Flexible Spending Accounts (FSAs) – both Health Care FSAs and Dependent Care FSAs – are almost always made through pre-tax payroll deductions. This means the money you contribute to an FSA is taken out of your paycheck before federal income tax, Social Security, and Medicare taxes are calculated.
- W-4 Impact: Because these contributions are already excluded from your taxable wages reported on your W-2, you do not enter FSA deductions on your W-4. Your employer's payroll system automatically adjusts your taxable income for withholding purposes.
- Important Note for Dependent Care FSA: While the contributions reduce your taxable income, if you have a Dependent Care FSA, you'll still need to report the employer's contributions (usually in Box 10 of your W-2) and the related expenses on IRS Form 2441, Child and Dependent Care Expenses when you file your tax return. However, this doesn't change your W-4 withholding.
General Rules for These Type of Deductions in Terms of Your W-4:
- HSA (via payroll): No, your employer's payroll already accounts for it.
- HSA (direct contributions outside payroll): Yes, you could account for these on Step 4(b) if you wish to reduce your withholding.
- FSA (Health Care or Dependent Care): No, your employer's payroll already accounts for it.
Regarding Estimating Medical and Dental Expense:
Yes, when estimating medical and dental expenses for tax purposes (e.g., for itemized deductions), you can generally total all qualified expenses. This includes:
- Premiums (for medical and dental insurance, subject to certain limitations)
- Deductibles
- Copays
- Other out-of-pocket expenses for diagnosis, cure, mitigation, treatment, or prevention of disease.
- Both prescription medications and qualifying over-the-counter medications (if prescribed or for a specific medical condition and not for general health).
- Tools and devices (e.g., crutches, wheelchairs, eyeglasses, hearing aids) if primarily for medical care.
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Terri Lynn
