By: Tom O’Rourke
Published: March 2021
Paying the least amount of taxes possible and staying out of trouble with the IRS are common goals. The Federal benefits package helps Federal employees achieve both of these goals.
Federal employees are eligible to participate in the Thrift Savings Plan, the Federal Flexible Spending Account (FSA), and the Dependent Care Assistance Plan (DCFSA). They may also pay any health insurance premiums on a pre-tax basis and, if they are enrolled in a high deductible health insurance program, to set aside funds on a pre-tax basis in a Health Savings Account (HSA).
The TSP not only allows you to save for retirement, it also provides tax benefits. The traditional TSP allows pre-tax contributions that provide an immediate tax saving. For example, a $10,000 contribution to the traditional TSP will result in a tax saving of $3,000 for an individual in the 30% state (8%) / Federal (22%) tax bracket. While contributions to the Roth TSP are made on an after tax basis, any withdrawals are tax-free if taken after you have been in the Roth TSP and are at least 59 ½.
The Federal FSA and DCFSA allow you to set aside money to pay any health care costs (FSA) not covered by insurance (such as deductibles or copays), and to help you pay child-care costs. In 2021, you may contribute $2,750 to the FSA and $5,000 to a DCFSA.
If you are enrolled in one of the health insurance plans under the Federal Employee Health Benefit (FEHB), your premiums are paid on a pre-tax basis by having premium costs deducted from your salary. If you are covered by a high deductible health insurance plan, you may also make a tax-deductible contribution of $7,200 ($3,600, if single) to a health savings account (HSA). If you are 50 or older, you may contribute an additional $1,000 to your HSA. Funds invested in an HSA grow on a tax-deferred basis and may be withdrawn to pay health care costs in the future.
If you are looking for a safe, legally permissible way to reduce your taxes and accomplish important financial goals, your Federal benefits package is a good place to look.
Tom O’Rourke is Of Counsel with the firm of Miles & Stockbridge P.C., a full service law firm with offices throughout Maryland, Washington, D.C., and Tysons Corner, Virginia. He began his legal career with the Internal Revenue Service, where he served in the Office of Chief Counsel for a period of 10 years and has been in private law practice since 1983. Mr. O’Rourke’s practice is limited to tax, estate planning, and pension matters. He regularly represents a variety of clients including individuals, small businesses, and not for profit organizations. He is an instructor with NITP, Inc.