A flexible spending account is an employer benefit offered by many employers. It allows you to set some funds aside to pay for qualified health care and certain other expenses with pre-tax dollars. The flexible spending account, or FSA, can be used alongside any sort of health coverage.
The tax benefits of a Flexible Spending Account (FSA) are substantial. Contributions to a flexible spending account are made pre-tax, including social security and Medicare taxes. This can help your healthcare dollars go further. Today, most FSAs are accessed via debit card; however, you should keep careful records of your FSA spending. The two most common types of FSAs are medical FSAs and dependent care FSAs.
Medical FSAs are the most common type. You can use a medical flexible savings account to pay for a wide variety of medical expenses. You may not use your FSA to pay insurance premiums. It can pay for vision care, insurance co-pays, prescription and over the counter medication, and dental care. Your flexible spending account can also be used to pay for chiropractic, orthodontics and contraceptives. You must spend the total of your FSA before the end of the plan year, so think carefully about how much to put into your medical FSA and how to spend it.
Dependent care FSAs are both less common and more complicated. Dependent care FSAs are not pre-funded, and you can only access funds as they are deposited. Child tax credits may be more appealing and financially a better choice than making use of a dependent care FSA for many families. Dependent care FSAs require that both parents, if married, be employed. Think carefully and look at the numbers before you choose to use a dependent care FSA for your childcare expenses. Eldercare services are also covered by the dependent care flexible savings account; however, long-term care services are not. Typically, individuals with a family income over $30,000 or those who spend more than $3000 on childcare for a single child will be better served by a dependent care FSA than by the childcare tax credits financially.
Flexible spending accounts can be a useful financial tool in your tax savings toolbox. Consider your overall financial picture when planning to use an FSA. The FSA may offer you substantial savings on health care and childcare expenses, when used thoughtfully.This can be especially true if you have substantial health care costs, whether those are associated with a pregnancy or orthodontics, your FSA and help you cover them and save in the process. Depending upon your income, using a medical FSA will save you between 20% and 40% on qualified expenses. Do be sure to spend it before the end of the plan year, to avoid losing the funds deposited and owing taxes on them.