photo © 2007 Jacob DaviesTax season is approaching, and I have looked at ways to save on my taxes. It is too late to sign up for 2011 unless you change jobs, but Flexible Spending accounts can save you big money on medical, commuter, and childcare through tax incentives.
What is Flexible Spending?
Flex spending accounts (FSAs) are a government approved method to pay for certain expenses before tax. For commuters, parking and monthly public transit costs are allowed. For parents, day care is allowed. For all people, certain medical expenses are permitted.
In my last job, I took the Light Rail to work every day. I ordered a monthly pass through a flex spend account and was able to pay for it pre-tax. I am preparing for PRK laser eye surgery, and will be paying for that from a health care flex spend account.
How Do You Fund It?
FSAs are funded through payroll deductions from your employer. When I was buying a $60 monthly pass, I had thirty dollars deducted from my account every paycheck to cover the cost. The deduction was pre-tax, so I had a lower taxable income.
I knew in December that I would be getting eye surgery this year, so I did research to find the average cost. I put in a conservative estimate ($3,500) to be deducted from my paychecks in 2011. That means about $135 will be deducted from each paycheck pre-tax. This will lower my taxes by about $1,000 this year, so the incremental cost for the surgery is only $2,500.
Commuter flex spend accounts can be enrolled or dropped at any time. If you have a fixed monthly parking cost or transit pass, just add it through your company’s HR department. It is that simple.
Health and dependent care accounts are set during your annual enrollment period or right after you are hired as a new employee. Some life events, such as marriage or the birth of a child, allow you to make mid-year changes. You are required to make a selection for your account before you need the money, so you have to estimate. Guess conservatively; keep reading to find out why.
How Do You Spend the Money?
IRS publication 969 gives you the details of what is considered an eligible expense. For the most part, any doctor appointments, hospital visits, prescription medication, medical devices, eye care needs, and medical operations are eligible. Over the counter medications are not eligible as of 2011.
If You Don’t Use It, You Lose It
That’s right. If you don’t use it, you lose it. If you make an election for $1,000 and only have $500 in medical expenses, you lose the $500 you didn’t use. Bummer, right? So estimate very conservatively. This is not a method for tax dodging, it is a tool to make certain expenses more affordable.
If you are a single twenty-something, you probably don’t need a health care FSA. I had a very specific need for the account, so I was able to accurately estimate the amount. However, I am healthy and rarely go to the doctor, so I will probably skip it in 2012.