Flexible Spending Accounts—Signing Up Now May Save You Money on Taxes Next Year

• Unreimbursed Health Care Expenses
• Dependent Care Expenses

• Lowers your taxable income by the amount you put in the FSA. Because you'd be paying those expenses any way, the tax savings is like a discount on those expenses. For example, if you're in the 28% tax bracket and you sock away in the FSA the $4,000 maximum your employer allows and use it to cover $4,000 of your $4,300 out-of-pocket medical expenses, then you could realize tax savings of up to $600. This is just an example. You need to look carefully at your individual situation.
• The plan now covers over-the-counter drugs, a boon with all the prescription drugs that have moved to OTC.
• Deposit $300, for instance, in the account and your take home paycheck may drop only $275 because of the tax savings.
• If you itemize deductions on your tax return, but know that your typical medical expenses barely exceed the deductible percentage threshold of 7.5% of Adjusted Gross Income, then the FSA could offer greater tax savings than taking the deductions on schedule A. For example, if you and your spouse have a joint Adjusted Gross Income of $75,000, you could deduct on Schedule A only the amount over $5625. But if you have only $4,300 unreimbursed medical expenses, the FSA would offer you greater savings.
• Typically, you can use the money you've agreed to place in the FSA before it's all paid in. Let's say in March, you fall down the back steps (ouch!), breaking your arm, your glasses and your pride, not to mention chipping a tooth. By the time you're on the mend, you've spent $750 on deductibles and the glasses and dental work your health insurance doesn't cover, but at $200 deducted per month you have only $600 in your FSA. Usually you can submit a claim for the whole $750, kind of an “advance” against the $2,400 total you've agreed to deposit.

• Use it or lose it. At present, if you don't spend all the funds within the year, you lose what you didn't spend. There is no rollover. The average amount left in accounts is about $100. On the bright side, you only have to buy the drug or have the service by the end of the year, the IRS allows 90 days extra time for claim submission and money disbursement.
• Just like insurance, you have to submit your claim and documentation to get the reimbursement from your FSA. Different companies handle the reimbursement process differently. So make sure the process at your company is something you are willing to do faithfully. (More and more companies are turning to some sort of “account card” to make use easier. In practice, these typically work like a debit card; in fact, many may be plan pre-paid debit cards.)
• Unless you carefully figure your estimated out-of-pocket expenses, you could put too much money in the account. So if you aren't willing to take the time up front to really look at your health care costs and do the math, then you could leave more than your potential tax savings in the account. Many employers offering the plan provide worksheets to help make this task easier.

• Lowers your taxable income by the amount you put in the FSA. Because you'd be paying for dependent care any way, the tax savings can act like a discount on those expenses. You must determine, however, whether what you would save is greater with an FSA or with the other dependent care tax credits available.
• Gives you an easy, dependable way to save for these necessary expenses.

• Use it or lose it. Like the Health Care FSA, if there's money left over at the end of the year you lose it. However, most participants, particularly those who use the FSA for day care, report no problem using the maximum.
• Figuring out which will save you more money—a dependent care FSA or the various child/dependent care tax credits—can take some doing. You may wish or need to consult your tax preparer to get the best answers for your situation.
• You can't easily withdraw mid-year, except in the event of certain life-changing events (as spelled out in your specific plan).