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Do you visit the dentist twice each year?
Make an annual visit to the optometrist?
Maybe you fill the same prescriptions every quarter year after year or have a standing appointment with a specialist.
In each of these cases, your medical expenses are probably consistent, predictable, and already a part of your monthly budget. So why not save money by not paying income tax on the money you spend on these and other medical expenses?
You can do so by taking advantage of a Flexible Spending Account (FSA).
Here’s what you need to know…
How FSA’s Work
Many employers offer a FSA program as a benefit for their employees.
By enrolling in this program (check with your company’s HR department; FSAs are probably part of your annual benefits enrollment program), you can save money on your taxes and spread your out-of-pocket healthcare costs across the whole year!
By committing an amount between $120 up to $6,000, you can benefit from an FSA account. Plan carefully though, unused FSA funds don’t roll over to the next year — they disappear!
Once you determine how much you want to commit to your FSA for the year, this amount is divided by the number of paychecks you’ll receive in the next calendar year.
EXAMPLE: Say you add up all your office visit and prescription copays and determine an allowance for over-the-counter drugs and decide you’ll spend $1,200 in healthcare out-of-pocket in the next year. If you’re paid bi-weekly, that’s a little over just $46 a paycheck being put into your FSA account, and accordingly a little over $46 deducted from your taxable income per pay period. At the 25% marginal tax rate, that’s about $11.50 in tax savings every paycheck, or $300 a year!
The great thing about FSA accounts is that even if you end up spending every dime of that $1,200 in January, you spread the cost out across the entire year. The full amount of your FSA commitment is available for you to spend on qualified healthcare items immediately — you don’t have to wait until your contributions add up. You’ll probably be given a debit card to use to access your FSA funds.
What’s Covered
Not only are physician, dentist, and vision expenses covered, a lot of over-the-counter costs are available for reimbursement from your FSA funds if you submit a claim form with a receipt. Many retailers, including Target and Walgreens, mark their receipts with, for example, an “F” to indicate an FSA-eligible item — everything from nonprescription painkillers to saline solution for sensitive-eyed contact wearers.
In addition to healthcare costs, you may be able to set up a Dependent Care Flexible Spending Account too, from which to pay eligible dependent daycare expenses.
Why pay more of your income to taxes than you have to? Take a look at your employer’s FSA options and take advantage of this opportunity to save money on planned out-of-pocket health and dependent care options.
You may have heard about another similar option: a Health Savings Account (HSA). Here’s the biggest difference between the two:
A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP).[1][2] The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty. Source
More About Flexible Spending Accounts
- HSA Eligible/Ineligible Expenses
- IRS Tax-Favored Health Plans
- Flexible Spending Account vs Dependent Care Credit
- The Easiest Way To Save Money: Automate It!
With input from Financial Advisors, (a Tax Accountant and an Investment Manager), I share helpful tips regarding money and finances — including debt relief, insurance, budgeting, and investing for retirement. My goal is to help you save more, spend less, and invest for the future by sharing honest, tried & true budgeting tips and tools. When I'm not saving for the future and helping others save for theirs, you can find me at the corner of Good News & Fun Times as publisher of The Fun Times Guide (32 fun & helpful websites).
