Question

A allows a taxpayer to put pre-tax dollars into an employer-sponsored program to cover medical expenses or child care costs.

O tax credit
O tax deduction
O flexible spending account
O tax deferred investment
O tax-exempt investmen

Answer 1

The correct answer is option 3. A taxpayer can place pre-tax dollars into a flexible spending account (FSA) through their employer to pay for medical expenses or childcare. FSAs lower taxable income, offering tax advantages over the taxable year. They are different from tax-deferred retirement savings like 401(k) plans.

Step-by-step explanation:

The option that allows a taxpayer to put pre-tax dollars into an employer-sponsored program to cover medical expenses or child care costs is known as a flexible spending account (FSA). An FSA is a type of savings account provided by employers that allows employees to contribute a portion of their earnings before taxes are deducted. These funds can then be used to pay for eligible medical expenses, such as prescriptions, deductibles, and co-payments, as well as childcare services.

The primary advantage of an FSA is that the money contributed is exempt from payroll taxes, thus reducing an individual's taxable income. As part of a comprehensive benefits package, FSAs are commonly offered alongside traditional health insurance plans, including health maintenance organizations (HMOs) that offer healthcare services for a fixed amount per person.

It's essential to understand that FSAs are different from other tax-advantaged retirement savings options, such as 401(k)s, which allow for tax-deferred investments in stocks, bonds, and annuities, thereby deferring taxes until funds are withdrawn during retirement. Unlike FSAs, 401(k) plans are specifically designed for retirement savings and come with different rules and tax implications.

Answer 2

A flexible spending account is an employer-sponsored program that allows employees to save pre-tax dollars for medical expenses and child care costs. It differs from other tax-advantaged options like 401(k)s, tax deductions, and tax credits, which serve different financial purposes.

Step-by-step explanation:

The option that allows a taxpayer to put pre-tax dollars into an employer-sponsored program to cover medical expenses or child care costs is a flexible spending account (FSA). An FSA is a type of savings account provided by employers that enables employees to contribute a portion of their earnings before taxes to pay for qualified expenses. These may include medical, dental, and vision expenses as well as dependent care costs. The contributions made to an FSA are not subject to payroll taxes, resulting in a reduction of the employees' taxable income.

To provide some context, there are other employer-sponsored retirement plans such as 401(k)s, which also have special tax status, often allowing for tax deferral until funds are withdrawn. However, these are geared towards saving for retirement, rather than covering immediate expenses like an FSA would. Unlike FSAs, 401(k)s allow for investment in stocks, bonds, and annuities. Tax deductions and credits, such as the earned income tax credit or child tax credit, have different functions. They are applied when filing taxes to reduce the amount of taxable income or to reduce the total tax bill, respectively.