Pre-tax deduction WWYD

[purplepenguin7]

I’m looking for some general advice on how to handle my pretax paycheck deductions including FSA, Dependent care and my 401k. Since having a baby last year our finances have been super tight to the point of having to use credit card and even carrying a balance which I hate. Despite making over $175k combined we almost never have any money after bills so I think I might be over deducting. I make most of the household income and have all the insurance and stuff out of my paycheck. Anyway, I currently max out the dependent care FSA (5k), about $500 in FSA and 8% goes to my 401k (match only up to 6%). I was thinking about reducing my 401k contribution down to 6% because we are really struggling. The rest of the deductions are money we’d spending anyway. Is there a better way to manage my deductions? I also claim O and withhold at the single rate but we owned a lot of money after we filed our taxes last year so I am hesitant to change that.

I should note that I’m 38, on track for retirement (I think) and have no real retirement plans.

[dcn]

Honestly I’d track your spending first and see if you can cut back anywhere. Whenever I feel like things are tight it’s because we are blowing money on stuff that we don’t need to be.

Also, those pre tax things are reducing your taxable income so decreasing them won’t help at tax time.

[orval]

I don't know much about the dependent care stuff, but you are using that FSA money for daycare, right? So reducing the tax savings will cost you more money? If you are using all $500 in the FSA then I wouldn't change that either.
I think I would look at where all of your money is going -- like your entire budget. If you don't have money after bills on those salaires, you might be spending $ on things you don't realize.

[sloan]

I mean, reducing your 401 contributions by 2% during the daycare years isn’t going to derail your retirement, but I doubt 2% after taxes (since it’s pretax now) is going to make a big difference in feeling strapped.

I’d start tracking every dollar you’re spending, just writing it down can be eye opening and the “pain” of writing it can discourage spending if it’s needless.

Did you feel strapped pre-kid? Adding childcare and diapers adds up, so if you didn’t have much wiggle room before because of a big mortgage or huge SLs or whatever then those may be a focus, but if you covered everything with ease before there’s probably some fat to trim before reducing your pre-tax deductions.

[farfalla2011]

I don't really have any suggestions other than really looking at your month to month spending. We're going to be in a similar position when I'm back to work in February from maternity leave. Fortunately/unfortunately depending on how you look at it, I know where our budget issue is and it's not going to be a quick fix (car loans). But we are making huge strides in our food budget which is helping.

[purplepenguin7]

We combed through our budget as much as possible but there isn’t much to cut. We have two high car payments, live outside of nyc with a high cost of living and a mortgage to go along with it. I’m not willing to cut cable, I can’t find a major carrier to reduce cellphone service and my husband is on the road for his job often so having a reliable wireless carrier is important to us. To answer one of the other questions, we weren’t strapped for cash pre-baby per se but $1,200 in daycare, diapers, increased grocery bills have cut into any savings we once had. Add in more take out and pre-prepared foods with two working parents and well now we are strapped for cash. I meal plan as much as possible but I work and commute long hours so sometimes it’s just not doable.

[ellipses84]

I did drop my 401k last year to 5% and have it set to auto increase 1% each year while my kids are in daycare, but it’s not my only retirement account and I don’t get a match. However, we also typically get a tax refund. If you owe, it will increase your taxable income so I may not make much difference at all. I’m sure the FSAs are benefitting you the most tax wise compared to not doing them. Do you have other benefit options that take out less per month? Do you have monthly subscriptions/auto pay things you aren’t using? I have a high deductible plan and HSA I’ve been happy with compared to my work’s non-HSA options I’d been on before and my paycheck deductions are less. I think looking at your monthly budget and finding areas to cut back in are going to help more than reducing your 401k contributions.

[AdaraMarie]

It doesn't sound like changing deductions will do anything for you.
Even if you don't want to it seems like cutting cable or trading in one or both cars for something with a lower payment might be the only ways to make a significant difference in cash flow. Especially if you've already done the obvious things like switching to store brand diapers and not eating out.

[dcn]

Nov 17, 2019 15:38:26 GMT -5 purplepenguin7 said:

We combed through our budget as much as possible but there isn’t much to cut. We have two high car payments, live outside of nyc with a high cost of living and a mortgage to go along with it. I’m not willing to cut cable, I can’t find a major carrier to reduce cellphone service and my husband is on the road for his job often so having a reliable wireless carrier is important to us. To answer one of the other questions, we weren’t strapped for cash pre-baby per se but $1,200 in daycare, diapers, increased grocery bills have cut into any savings we once had. Add in more take out and pre-prepared foods with two working parents and well now we are strapped for cash. I meal plan as much as possible but I work and commute long hours so sometimes it’s just not doable.

I’d consider trading in one or both of the cars for used ones that you could not for in cash (if that’s at all possible or to reduce payments). That would free up a good chunk.

I’ll also recommend You Need a Budget. It’s a great software that forces you to give each dollar a job/purpose. So when you get your paycheck you plan our exactly where it is going to go. It definitely shined a light on our spending.

Or if you are brave you could post your budget here:). Sometimes an outside perspective can be helpful.

[waverly]

I agree that the only thing jumping out at me is perhaps a cheaper car.

I have a lot of commiseration though. We were in the same spot, but at one point both our cars were paid off. We had to do numerous repairs to our house and were drowning in medical bills for my son. We still haven’t gotten all the way out but the kids are school age now, and we only have to pay for aftercare which gives us some breathing room.

The other thing you might consider is increasing your income. Maybe that means asking for a raise. Maybe a side hustle you could do with just 4 hours on a weekend? Or maybe you both do a little and switch off child care.

Also in terms of take out, we are eating a lot more at home and it definitely saves money. My husband traveled for years for work, so I get that. But lately he’s been in the cooking mood and we get different yummy food for 1/3 of the price of what we used to spend eating out. I excel at boring meals that take 15 minutes and are faster than picking up take out think spaghetti and tacos. They get super boring week after week, and I get the second shift, but sometimes I find that easier than take out even if it’s just replacing one restaurant meal a week it is a big savings for us because prices at restaurants have gone up so much plus 4 people so it’s about $200 a month if we just eat in one extra meal a week.

When my youngest was preschool age we switched from the daycare model to the pre-school/ camp model which got us from about $500 a week to $290 a week (2 kids in daycare to 2 kids one school age one preschool). That helped a lot too.

[purplepenguin7]

thanks all! I am not going to post my budget only because I know exactly what advice I will get and but they aren't changes we are willing to make at this time. Good news is I am getting a raise in April and should be getting a small bonus early 2020. I mostly just wanted to know if I should change my deductions to get more take home pay since I am only getting about 40ish percent of gross pay. I appreciate the advice though and will keep my 401k as is.

[purplepenguin7]

last year was the first and only time we owed money so I am not sure what to expect for this year. My maternity leave didn't have federal taxes taken out (which I stupidly didn't realize) and my husband sold a stock so it was definitely an abnormal year, plus our accountant said we weren't eligible for any deductions from the baby since we hadn't paid for childcare in 2018. I'm hoping/expecting our 2018 return to be back to normal (refund instead of owe).

[RockNVoll]

Sounds like you have an expense problem, not an oversaving problem.

[tres3]

Since you don't want to make changes, I would recommend taking your bonus and raise and putting them towards your car payments. Get at least 1 paid off asap and then keep it.

I drive a 12 year old minivan. Are my kids mortified, yes... do the police tell me not to park it on the street, yes... but guess what It is paid for. It is really freeing not having any debt besides our SLs.

[tres3]

another suggestion... sign up for one of the meal subscription services like Hello Fresh.

I'm devastated that Plated ended it subscription service but we saved $$ using it because even though it was more $$ than if i planned and shopped myself it wasn't much more maybe $10 more than what I would have spent at the grocery store, it was $40 less than if i just came home exhausted and said lets go to the local casual restaurant for dinner.

[wizardressofoz]

What kind of overrun are you having monthly? Like $100,$200, $500? More?

We were in that spot when we had DS and ultimately DD. The only thing I’d tell you is that I’d keep up with the FSA and HSA accounts and ensure that you’re on top of getting reimbursed from them - the FSA for daycare is possibly part of where you’re feeling the pinch as you’re getting the  money taken out and paying out at the same time. Can you get ahead of yourself by borrowing a week or two of daycare from your savings?  If you’re going to drop something, I’d drop your 401k to the match and commit to updating it when you get a raise or out of this cycle.

also, if you have an accountant, see if you need to adjust your withholding in some manner. 

it took us a while to settle in our budget after having kid 1 and kid2. It’s hard.

[Susie]

I agree with everyone else, there's really nothing to change in your deductions that will ease the pinch.  

If you are spending the whole $5k from your daycare FSA on daycare, reducing daycare FSA deductions will only increase the amount of tax you pay, while not reducing your daycare expenses.

If you are spending the whole $500 from your FSA on medical expenses, reducing FSA deductions will also only increase your taxable income, and therefore taxes, without decreasing expenses. 

If you decrease your 401k contributions from 8% to 6%, you're keeping that 2%, but now you're paying taxes on it, which you weren't before.  If you reduce your 401k below 6%, now you're giving up free match.  And in any event, you're not increasing your take home by all that much.

I have 2 kids in daycare, and it's $$$$ painful.  I get it.  But this problem is not one that withholding sorcery can fix.  You have to either make more money or do the painful work of aligning your spending to your income.

[jwright]

I would try to run an estimate of your 2019 tax return and see if you will really owe or if last year was an anomaly. Also, you should have gotten the $2,000 child tax credit in 2018 regardless of spending on expenses (assuming you are under $400k joint income).

[wildrice]

Nov 17, 2019 23:03:05 GMT -5 purplepenguin7 said:

last year was the first and only time we owed money so I am not sure what to expect for this year. My maternity leave didn't have federal taxes taken out (which I stupidly didn't realize) and my husband sold a stock so it was definitely an abnormal year, plus our accountant said we weren't eligible for any deductions from the baby since we hadn't paid for childcare in 2018. I'm hoping/expecting our 2018 return to be back to normal (refund instead of owe).

How much of a refund did you normally get?

I'd be really nervous to have less taxes taken out of your check unless you think you'll get a huge refund. If you are struggling to keep up with expenses now, where will the money come from if you end up owing taxes at the end of the year because you didn't have enough taken out of your paychecks? 

Have you looked into alternatives for cable? Switching companies or removing certain channels or services? Depending on what you're paying, there are options like Hulu Plus or Sling TV that give you all the same channels but might be cheaper. Consider getting rid of multiple cable boxes, DVR, etc (we only have a cable box in the living room so we only use streaming in the bedroom - which we hardly notice. Nearly every show is available on-demand so we really don't need DVR. Etc). I know you don't want to cut, but what if you could find ways to cut back and still have what you need?

Could you combine your cell phone plan with extended family? My parents, H, and my sister and I are all on the same family plan. It saves us a ton and I just send my mom money every month to cover our portion.

Finally I would look at doing something about your high car payments. If you aren't underwater on the cars I'd sell one or both and get something more affordable. We recently bought a used Honda Civic and it's great. Prior to that we drove a 9 year old car and it was lovely having no car payment for the last 4 years or so. I know it's a hard adjustment if you enjoy having nice cars, but personally I think having less stress financially is worth it (there was a time when my XH and I were spending close to 20% of our pay on car payments - it was ridiculous and I would never go back to that knowing now how nice it is NOT TO have that burden).

ETA: much of that won't be life changing, but if you are looking to save 2% of your income, I think you could get close to that in other ways!

[ssmjlm]

As pp have said, reducing pre-tax benefits for more cash in hand won't really help in the long term and it increases what can be taxed.

If you won't have a CTJ talk with yourselves, I'm not sure what else we can do for you. Reducing your spending seems to be the easiest solution and yet you want to look everywhere else.

[formerlyak]

I agree that even if you don't want to hear what we have to say, posting your budget might be eye opening.

When I divorced and lost 1/3 of my household income and got no child support, I had to make some really hard financial choices. In your case, you know the budget will get better in a few years when the cars are paid off and you don't need diapers. But until then, you have to make cuts. If you don't, and you keep relying on your credit cards, that will add up and once you have cars paid off you will have cards to pay off, putting yourself in the same position.

[mcsangel2]

If last year was the first year they owed taxes, and that's after now having a dependent to claim, and they live outside NYC, I'm assuming the culprit is the cap/change in the amount of mortgage interest that can be claimed. It's really hurting people who live on the coasts, and it's not going to change for the foreseeable future. The only thing that will help is reducing your expenses or making more income.

[tres3]

Nov 18, 2019 19:09:39 GMT -5 mcsangel2 said:

If last year was the first year they owed taxes, and that's after now having a dependent to claim, and they live outside NYC, I'm assuming the culprit is the cap/change in the amount of mortgage interest that can be claimed. It's really hurting people who live on the coasts, and it's not going to change for the foreseeable future. The only thing that will help is reducing your expenses or making more income.

my guess is they are one of the many new yorkers who got screwed by "tax reform".  The caps on state and local taxes probably really stings. 

Over in TN, with our low property taxes and no income taxes I made out like a bandit and got my first refund in probably 10 years last year. 

[awkwardpenguin]

Nov 18, 2019 19:09:39 GMT -5 mcsangel2 said:

If last year was the first year they owed taxes, and that's after now having a dependent to claim, and they live outside NYC, I'm assuming the culprit is the cap/change in the amount of mortgage interest that can be claimed. It's really hurting people who live on the coasts, and it's not going to change for the foreseeable future. The only thing that will help is reducing your expenses or making more income.

More likely the state and local taxes cap.  The mortgage interest cap is only on interest paid on mortgages over a$750k for MFJ, so it doesn't affect many people.

[oswin]

Uncertainty about taxes is the reason that I do our taxes myself. I have a spreadsheet that has a tab for each form, and every year I update the forms as necessary (literally writing out every single line, and putting any math in). This enables me to fairly accurately model our taxes every year, even as we have job changes, etc.

Anyway, it sounds like you probably need to take a harder look at your budget or resign yourself to a decade of credit card debt.

Oh, and lots of budget cell phone providers are using the major networks anyway, they're reselling capacity. Usage-based billing like Ting has could potentially save a lot of money, but only if you aren't heavy data users (it's easy not to be, but requires actual thought if you're used to unlimited data and stream a lot off of wifi).

As for take-out and pre-prepared foods, that's great if you can afford it, but it sounds like you need to cut back. I get it, we've got 3 kids and most of the time DH and I are both working, and it's hard. But throwing together a quick cheap meal like mac and cheese with veggies doesn't take much longer than ordering take-out (and waiting for it and picking it up). Or I could list a bunch more quick and cheap things. We almost never get take-out, it's a whole other kind of hassle that we don't bother with and it saves us money.

[egeiger]

Nov 19, 2019 11:54:40 GMT -5 oswin said:

Uncertainty about taxes is the reason that I do our taxes myself. I have a spreadsheet that has a tab for each form, and every year I update the forms as necessary (literally writing out every single line, and putting any math in).

Is this spreadsheet something you might be willing to share? I need something like this! I’d even be willing to pay for it.

[dragon's breath]

I would adjust your withholdings before messing with deductions. Not having taxes taken from maternity leave can help explain why you owed last year, however, going to Single and 0 on your W-4 is probably overdoing it the other way. Go through the withholding calculator and see what it says, then withhold one less for some buffer at tax time, or withhold at the single rate instead of married, but both is going to leave you in a pinch all year.

You can estimate your taxes on a few different websites; they likely won't be 100% accurate, but should get you in the ballpark.

www.efile.com/tax-service/tax-calculator/2019-tax-calculator/

It's hard to give up things we already have (even if we haven't paid for them fully), but at some point, something needs to be sacrificed if you truly can't meet your obligations and have some room to breathe. A car may be a need, but a nice car with a big car payment is a want. Food is a need, but takeout is a want. If you can afford those things, great, but if not, look into ways of making them less expensive. I get not wanting to put real numbers out there to be picked apart, but it does limit more helpful suggestions.

[kershnic]

Don’t mess with your FSA stuff if you’re using that money, you’ll end up paying more in taxes.

But in general tax withholding doesn’t need to be a guessing game. The IRS provides a calculator to tell you if you’re on track or not. www.irs.gov/individuals/tax-withholding-estimator

It sounds like you’re getting hit hard by Republican tax reform, which sucks. But changing your withholding is not going to change how much money you actually have to spend, and ultimately you may have to choose between credit card debt and making changes to your lifestyle (or your lifestyle in retirement).