For many employees, it’s open enrollment season! This is the time where you get to make various elections related to the insurance your employer is offering, and the choices you make will definitely impact your tax situation! Let’s talk about a couple of ways to save on taxes during open enrollment.
Medical Insurance
At most employers, your medical insurance comes directly out of your paycheck as a pre-tax deduction. This means the money you spend on medical insurance doesn’t count toward your taxable income – it’s taken out of your check before they start calculating taxes. This is why when it comes to tax time, you aren’t deducting these from your return – they already came out once.
While this means the more expensive your medical insurance is, the lower your tax bill will be – but nobody wants higher premiums. Instead, depending on your plan, you may be offered an FSA (Flexible Spending Account) or an HSA (Health Savings Account).
An FSA is money you are setting aside for your medical costs for the upcoming year. This is a “use it or lose it” plan, although there are provisions to carry a small amount over to the next year. If you can reasonably approximate what your health care costs are going to be (without going over, because you don’t want to “lose it”), you can have this deducted from your paychecks in a pre-tax manner, and then when you incur medical expenses, you can pay or be reimbursed through your FSA. For example, I had some significant dental work done this year – so I had the maximum allowable amount put into my FSA (which was $3,200 in 2024, increasing to $3,300 in 2025). I’ve since spent all of that money (and then some!), so I’ve essentially saved on taxes.
An HSA works somewhat similarly, but with some differences. While an FSA belongs to your employer, an HSA belongs to you. Your employer can make contributions to it at their discretion, but it’s your account. Money put into your HSA still comes out before tax, but there’s no longer a “use it or lose it” provision – you can continue to grow money in the account until retirement, or until it’s needed. With this, most HSAs will offer investment options so you can grow your money for the long run. There is of course a catch – you must have a HDHP (High Deductible Health Plan) in order to make HSA contributions – so if you have a good health plan at work, you may not qualify for this option. In 2025, a High-Deductible Health Plan must have a deductible of at least $1,650 for self-only coverage, or $3,300 for family coverage. If you qualify, you can contribute up to $4,300 for self-only coverage, or $8,550 for family coverage. If you’re relatively healthy and don’t have much medical expenses in most years, this can be a great option to build up a nest egg while also reducing your taxable income.
Retirement Plans
Depending on your employer, you may have access to a 401(k) or other similar qualified retirement plan. Depending on your income level, you may also be able to open your own IRA. These can also be great ways to reduce your taxable income – For example, if your federal and state taxes total 30%, your $1,000 contribution to a 401(k) or Traditional IRA may only cost you around $700 in take-home pay.
Many of these retirement plans come in 2 flavors – Traditional or Roth. Traditional plans are done pre-tax – you won’t pay taxes on the money put into these accounts, but you will pay taxes in retirement when it’s time for the money to come out. Roth plans are done post-tax – you will pay taxes today, but in retirement you will not pay taxes when the money comes out. This is where some careful tax planning can be really helpful – if you expect your tax rate to be significantly higher in retirement, Roth contributions may be a better bet today. If you expect your taxes in retirement to be lower, Traditional may be a better option.
Summary
These are just a couple of ways to think about taxes during open enrollment. Depending on your employer, there may be more options or fewer options. And if you’re self-employed, the list can vary wildly depending on your situation. Always consult a trusted tax professional before making any big decisions like these. If you’re looking for a tax pro, visit our Contact Us page to get started with JCT Tax Solutions!
