Flexible spending accounts are valuable financial tools. These will help you save tax money.
November and December is the time when many companies offer open enrollment in their benefit plans. New employees are also given the opportunity to enroll in this type of plan when they are first employed. If you have never enrolled in your company’s Flexible Spending Account you might be missing out on some tax savings.
There are two types of flexible spending accounts. There is a medical FSA and a Dependent Care FSA. Flexible spending accounts are a way to set aside money from your paycheck and not pay taxes on that money. If you decide that you want to take advantage of this type of program you need to be aware of the benefits and the drawbacks.
Here are the types of expenses that you can use with a Dependent Care Flexible Spending Account:
Preschool and child care expenses
School age child care expenses
Dependent care expenses for an adult family member who lives in your household
See your dependent care savings in your paycheck by increasing your spendable income
Lower your taxable income and possibly your tax rate
The amount of tax credit you will be allowed is based on your income. The maximum amount allowed is $3,000 per person. You can either use the dependent care flexible spending account or the dependent care tax credit at the end of the year. So, in other words, using the dependent care spending account will reduce the tax credit at year end on your tax form.
If your spouse has a flexible spending account at their place of employment, you could both sign up for the dependent FSA and could have up to $2,500 deducted from each parents paycheck. Remember, too, that the tax credit at the end of the year only saves on Federal taxes. By using the Dependent FSA you save on Fica and Medicare taxes as well.
Benefits of Using a Medical FSA
The medical FSA works the same as the dependent FSA. You set aside a certain amount of money to be deducted from your paycheck each pay period and the money is set aside to be used for medical expenses during the year. This money is also eligible to be taken out of your paycheck without paying Federal, Medicare, and FICA tax.
Types of Expenses you can pay for with a Medical FSA
You can only use the money in a medical FSA to pay out of pocket medical, dental, and vision expenses such as:
Deductibles and insurance co-payments for Doctor’s visits and hospital expenses
Mileage for Medical Treatment
Special equipment for a disabled family member
Eye exams and eye glasses
Remember, that expenses paid by your insurance company to providers, is excluded. Also you cannot use the money in your medical FSA for cosmetic surgery.
Now for the Drawbacks
The only drawback I know of is the use it or lose it policy. Remember that flexible spending accounts are regulated by the Federal government. Your employer does not make the rules. Any money that is left over in the medical FSA or dependent FSA then belongs to the Federal government. More than likely the money left in the account, would be a minor amount. Probably much less than what you would have had to pay in taxes.
A good place to see what kind of expenses you will have for the coming year is to look back last year at your dependent and medical expenses. That will give you a good starting point. If you find, as you get closer to the end of the year, that you still have money in your account, here are some things that you need to do:
Have an eye exam and, if you need eye glasses, be sure to purchase them by the end of the year.
Purchase any prescriptions that your health insurance will allow you to purchase, and do it before the end of the year.
Be sure to visit your dentist for a teeth cleaning.
If you need dental work, before the end of the year is a good time to schedule and pay for it.
Take a close look at your records, make sure you have submitted everything, and have receipts. If you are missing any receipts, contact your provider to obtain documentation. You will have till December 31st to schedule and pay for any allowable expenses. You then will have until April 15th to get your paperwork in for your reimbursement. April 15th is the deadline, but you can request your money from your account at any time during the year. Just be sure that you have requested it all by the April 15th date. Many times your flexible spending account is handled through your health insurance company. In that case reimbursement would be handled for you with nothing for your to file.
If you are informed about Flexible Spending Accounts, there is no need to miss out on the savings they can give to you. Why let the government use your money all year round? You certainly have a better use for it. Putting more money in your paycheck each week will make things just that much easier for you and your family.