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March 2008

Some Salary Deductions Get Special Tax Breaks

April 15 will be upon us soon, so as you prepare your tax returns, keep in mind that TRS members get two valuable tax breaks.

Pension contributions. The federal government defers current income taxes on your mandatory contributions to the pension plan. Your TRS contributions should appear in Box 14 (as 414-H) of your W-2 form; this amount is deferred from federal income taxes. Don’t forget that you are required to add back the Box 14 (414-H) amount to your New York State tax return.

The amount of savings is based on your personal income tax bracket. Here are some examples of what the savings could be worth to you:

  • If you earned $20,000, contributed $600 to the TRS and are in the 15 percent tax bracket, you would save approximately $90 in taxes.
  • If you earned $40,000, contributed $1,200 to the TRS and are in the 25 percent tax bracket, you would save approximately $300 in taxes.
  • If you earned $80,000, contributed $2,400 to the TRS and are in the 28 percent tax bracket, you would save approximately $672 in taxes.

The savings apply whether you use standard deductions or itemize — but only on your federal tax returns.

For state and city income tax returns, you will have to add in your pension contribution on line 21 of the state’s long form (IT201) or on line 13 of the short form (IT150). Follow the instructions for “public employee retirement contributions” that are in the instruction booklet.

Flexible spending plans. The Internal Revenue Code allows you to pay for certain expenses on a pre-tax basis, thereby reducing your federal and Social Security taxes.

As a UFT member you can choose to join the Medical Spending Conversion Plan, which allows you to pay for optional health insurance benefits; the Health Care Flexible Spending Account, from which you can pay for any medical expense that is not covered by your insurance, including co-payments and deductibles; and the Dependent Care Assistance Program, which you can use to pay for the care of eligible dependents inside or outside your home (including day care and summer camp for a child if both you and your spouse work full-time).

The amount you designate will be deducted from your paycheck and placed in your account, which you then cannot use for any other purpose. However, if you do not use the funds, you lose them. Your tax savings depend on the cost of the benefit you are buying and your tax bracket.

Box 14 of your W-2 form shows the amount you have contributed to a flexible spending account that is being excluded as taxable income.

Since the deduction applies only to federal taxes, be sure to add in this flexible benefit amount to your state and city income tax returns on line 23 of the state’s long form or on line 14 of the state’s short form. Detailed instructions are in the instruction booklet.

It’s now too late to sign up for a flexible spending account for 2008. Under city rules, you can join a flexible spending account only during an enrollment window that opens in the fall for the following calendar year, usually from late September through late November. If these tax-saving accounts appeal to you, watch the New York Teacher in the fall for information about how you can participate during 2009.

NOTE: While flexible spending plans save you money by reducing your federally taxable income, they do not reduce your income for pension purposes. The UFT has successfully sponsored legislation that requires members’ pensions to be calculated on their full income prior to these deductions.

Tax Notes on TDA Contributions

Tax-deferred annuity. The federal government defers current income taxes on TDA contributions until you withdraw the money. Most states, including New York, also defer state and local income taxes on TDA contributions. However, six states, including New Jersey and Pennsylvania, do not allow deferral of state income taxes. Please follow your state’s rules.

In addition, there is a new Retirement Savings Contributions Credit for federal taxes only. You may be eligible to take a credit of up to $1,000 for qualified retirement savings contributions. However, you cannot take this credit if your adjusted gross income (AGI) on line 35, federal Form 1040, is more than $25,000 ($37,500 if head of household, $50,000 if married filing jointly). In other words, you may be entitled to a credit of up to 50 percent of your TDA pension contributions, up to a maximum of $1,000, from federal income taxes if your AGI is within these limits.