A flexible spending account (FSA) lets you save money for important expenses without paying taxes on it. You could save hundreds of dollars on your taxes if you do this. Simply put, a portion of your pay is set aside by your employer to pay for qualified expenses. This reduces the amount of tax you have to pay at the end of the year.
There are three main kinds of FSA:
- The Health Care FSA, which is also called the Medical FSA, the Medical Expense FSA, or just the Health FSA. This is a savings account for qualified medical costs. These can include insurance deductibles, co-payments, and co-insurance costs, as well as products, treatments, and medications that are not covered by insurance. Medical problems can be very serious or as simple as buying enough band-aids to last a year.
- The dependent care FSA, which lets you save money for qualified child care costs. Even though they are usually used for children, they can also be used for "adult day care" for elderly people who live with you, such as parents.
- The travel FSA, which lets you save tax-free money for costs like public transportation and, in some cases, parking.
(Keep in mind that you can't move money from one type of FSA to another, even if they are with the same company.)
The math behind how FSAs save money is simple. If your base salary is $40,000 and you use a $5,000 Dependent Care FSA and a $2,000 Health Care FSA, you will only have to pay taxes on $33,000. So, you'll save the following amount: (your tax bracket or, if you itemise, your effective tax rate) x (your tax rate if you don't itemise) (the amount you put aside). If you put aside $7000 and your tax bracket is 28 percent , your savings is $1960. (One thing you should talk to a tax expert about is how it affects people whose medical costs are more than 7.5% of their annual income. If that's the case, itemising the deductions might save you more money on taxes than the FSA.) Because there may be other things that affect your taxes, you should ask a tax pro or use a popular tax programme to figure out how much you could save.
The FSA Debit Card is a new thing on the market that makes things much easier, smoother, and less paper-heavy. After you sign up for an FSA account, you can use these credit cards to pay for any of the above costs. At the moment, at least 7 million debit cards are linked to an FSA account. This is close to one-third of the people who have FSAs. It is expected that this rate will go up to 85% by 2010. If you don't use a debit card, you will need to show proof of payment for qualified expenses, like receipts, bills, or statements.
When you sign up for an FSA, there are two very important rules you should be aware of. Most importantly, all of the money set aside must be spent within the "plan year," which is usually the calendar year but can be the fiscal year for some companies. At the end of the "plan year," any money left in the account goes back to the company. Second, the costs must be "allowable." A description of the qualifying expenses might be different from one company to the next, and even if it was the same, it would be too long for this article even if it was the same. But they are usually fair and make sense: Dependent care costs include most day care and other child care, and medical costs include most products used to treat or sometimes prevent a medical problem. Before you sign up for an FSA plan, you should make sure you know what is covered, what isn't covered, and what the rules are.
