If you have signed on to a flexible Spending Account (FSA), you likely know about its tax advantages. Your FSA is the money you ask your employer to set aside from your regular earnings for qualified medical or dependent care expenses. The money is available to fund for co-payments and health insurance deductibles, dental expenses, and more.1 You can set aside a maximum of $2,600.
Middle-income earners who deduct the full amount from their pay can save about $600 in income taxes. Married couples can have individual FSAs and dependent children medical costs can also be covered.
FSAs: Use It or Lose It
You may know that an FSA comes with some strings attached. The biggest constraint is that all the money you set aside in an FSA must be spent by the end of the plan year. You will lose any unused FSA funds remaining at the end of the year, although the tax deduction will remain in effect.
The good news is that your employer has the option to extend the FSA grace period up to about 10 weeks or allow you to carry over $500 per year of unused funds. Also, your employer can also contribute to your FSA. You don’t pay federal income tax or employment taxes on your or your employer’s contributions to your FSA.
FSAs Can't Be Used for All Things
Also, you cannot use your FSA to pay your health insurance payments. Reimbursements for over-the-counter medications, except for insulin, must be covered by a doctor’s prescriptions. Also, any amount you pay for long-term care or are reimbursed from other health care plans cannot be covered by your FSA.2
Be Wary of Common FSA Blunders
So, an FSA is a good deal, but to take full advantage of what it offers, you need to know what it covers and how it affects your income tax deductions. Here are top 4 mistakes to avoid while looking after your FSA:
1. Bad planning
A well-planned FSA can be an outstanding budgeting tool. Before you ask your employer to withhold a monthly amount, remember that an FSA is a “use it or lose it” savings plan. Knowledge is power. Learn all you can about FSA coverage and leverage that knowledge to set aside the money to pay for costs your regular health insurance doesn’t cover.
2. Failure to revisit the plan
With the December 2017 tax reform bill, among other things, individual tax rates have changed. Do the math or get some qualified tax advice. You could lose out on significant tax savings, or worse, end up forfeiting some of your potential savings if you don’t pay close attention to managing your FSA.
3. Poor records keeping
Be scrupulous and methodical in preserving medical treatment records and receipts. IRS audits can die on the vine if your receipts match your deductions, or you could get that “amount you owe” notice when the benefit of the doubt goes to the auditor.
Even though your employer-issued FSA card records may satisfy many of the records keeping requirements for most of your deductions, be on the safe side and save everything.
4. Trying to double-dip or failing to claim the excess spending elsewhere
You cannot include amounts you deduct and expend for your FSA as an after-tax medical expense.3 On the other hand, if you didn’t follow our advice on planning and you overspent your FSA, you can deduct that overage as an additional medical expense. See IRS Publication 502 (2017) for authorized medical deductions.
In these times of high medical costs and co-payments, an FSA is the wise choice. You can set aside money for those extra dentist expenses and subtract them from your pre-tax income. Be sure to check coverage eligibility and tax implications.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.