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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: skinnyindy on February 19, 2017, 07:19:29 AM

Title: Pre-tax salary deductions
Post by: skinnyindy on February 19, 2017, 07:19:29 AM
I'm not sure how to figure this out, maybe you guys know.  We get our employees portion of our medical insurance taken out pre-tax.  But that plus our medical expense account deduction has added up to around $20,000 this year.  The problem I see is that our Social Security contribution is then calculated on the remaining salary.  So if we live long enough to get Social Security and it is still around, won't we get much less in benefits?  How can we compare that to the tax savings?  Is it better to claim medical expenses in our tax return?  Because we could do that instead.  One last twist to this puzzle, this is the year we will use for our first FAFSA for our first kid going to college.  So I think we want our income as low as possible (pre-Tax deducted).  What should we do?  Who should I ask?
Title: Re: Pre-tax salary deductions
Post by: Cheddar Stacker on February 19, 2017, 07:32:38 AM
Take advantage of every pre-tax deduction you can. You are correct that medical costs reduce your SS wage base. This is a good thing. It saves you 7.65% in taxes between SS and Medicare. The fact that your SS benefits will be lower from this is not worth thinking about. Invest the 7.65% you saved and you'll come out way ahead.
Title: Re: Pre-tax salary deductions
Post by: YttriumNitrate on February 19, 2017, 07:51:51 AM
On thing to remember is your social security benefit does not linearly track your income. For example, 90% of the first $856 a month you make a month counts towards your SS benefits. Only 32% of the amount between $856 and $5157 counts towards your benefit, and 15% of anything above $5157 (but below the annual cap). (
In contrast, by taking the deduction you are reducing the amount taxed at your highest level.
Title: Re: Pre-tax salary deductions
Post by: skinnyindy on February 19, 2017, 07:53:24 AM
I don't think Medicare is affected.
Title: Re: Pre-tax salary deductions
Post by: skinnyindy on February 19, 2017, 08:05:38 AM
I see, the way the calculations are made does change things.  But it feels like such a large amount it looks scary at first.  I'm having trouble saving any money so getting less SS is hard.  I know I shouldn't count on it but we will need anything we can get.  Hard too that working more has kept us from adding debt but may keep us out of financial aid.  Living in a hcol place is hard when it comes to things like this.
Title: Re: Pre-tax salary deductions
Post by: maizefolk on February 19, 2017, 09:07:36 AM
The calculation YttriumNitrate mentioned is done globally at retirement for your 35 highest earning years. So if you've already made $371,700 in wages ($885*12 months*35) that had SS taken out of them over your entire lifetime,* you've already go the highest bag for buck part of your social security check covered for life. If you make it to $2.25M ($5336*12 months * 35 years), the value of additional social security eligible wages drops again.

I could see trying to game the system if you're below $371,700 in covered wages and expect to retire before you hit that cap. At that point, each extra $100 of social security eligible income means paying $6.20 in taxes, but increases your annual social security checks by $2.57 (the equivalent of buying an annuity with 41.5% annual return). Even if you figure in the likely cuts to SS's payouts in coming years, and that fact you'd likely also end up paying some additional taxes in the process of trying to increase your social security eligible income, that remains a pretty good deal. However, if you expect to have earned more than that amount in SS covered wages by retirement, I wouldn't worry about it.

*There is even an inflation calculation that adjusts the value of wages earned in earlier years upwards, so the actual cut off is likely less than that.

**Our numbers are slightly different but it's just because these were also adjusted for inflation between 2016 and 2017.