Feature Articles: Financial Information & Tips
Flexible Spending Accounts are powerful tool for reducing taxes
Flexible Spending Accounts are a powerful financial tool that can help reduce taxable income, according to Annette FitzGerald, a former family financial education specialist with University of Missouri Extension.
“Flexible Spending Accounts are available through most employers and now is a good time to review your financial records and prepare for tax savings,” said FitzGerald.
A Flexible Spending Account or FSA is a program that offers tax advantages and allows employees to pay for eligible health care and dependent care expenses with pre-tax dollars.
“If you choose to participate in FSA, the amount you choose to contribute on an annual basis is withdrawn from your paycheck in equal installments each pay period,” said FitzGerald.
Most employer plans offer two different flexible spending accounts: one for qualified medical/dental expenses, and one for dependent care expenses.
According to FitzGerald, it is important to first check with your employer to ensure your medical and dental expenses are qualified expenses that can be covered, and then plan how you will use all the funds contributed to the FSA by year end.
“It is also important to give some thought to determining how much money you plan to contribute, because if you don’t use the money you may lose it,” said FitzGerald.
For example, if you have $100 per month contributed to the FSA ($1,200 for the year) and you submitted $1,000 in allowable expenses, you may lose the unused $200.
The IRS does allow employers some flexibility at the end of the year for health FSA balances. Employers can choose to have unused health FSA balances up to $500 to be rolled over into the FSA for the following year. Or employers can choose to include a grace period of 2.5 months to the end of the plan year. For example, if a plan year ended on December 31st, employees would have until March 15th to spend the remaining balance in their FSA. These changes are dependent on the employer making the change in the plan. These changes do not apply to dependent care FSAs. Check with your employer on your plan’s details.
Many employer FSAs now provide debit cards which allow for an electronic transfer of pre-tax dollars from an employee account to pay for qualified expenses. Employees can use their medical and dependent care funds by using their card at the point of service.
Reviewed and updated by Andrew Zumwalt, Assistant Extension Professor, Personal Financial Planning, University of Missouri Extension
Last update: Tuesday, October 18, 2016