Have you opened a Flexible Spending Account yet? Open enrollment occurs during November and December depending on your place of business, and it is a great way to save money tax-free for medical expenses.
What Is a Flexible Spending Account
A Flexible Spending Account (FSA) allows employees to contribute a certain amount of pre-tax dollars (usually up to $4,000 to $5,000, depending on the company) to be used on preapproved expenses including, but not limited to, medical co-pays, prescription drug co-pays, deductibles, and charges not covered under insurance such as orthodontics. Because the money is set aside before taxes, not only do you get to use money that you have not had to pay taxes on to pay your medical expenses, but your gross income looks lower than it actually is when you complete your tax return, which affects the amount of tax you must pay at year end.
Cautions with a Flexible Spending Account
While FSAs are a great alternative to pay out of pocket medical expenses, be advised that if you do not use the full amount in your FSA by the end of the year, you will lose the money. (Some companies offer you a grace period of 2 to 2.5 months beyond the end of the year to use up your FSA contributions, but you need to verify this with your employer.)
If you have extra money in your FSA, it is fairly easy to use it up—buy new glasses or contacts, have the minor surgery you have been putting off, replace old mercury fillings in your teeth; if you are creative, there are plenty of ways to use up the money, and there is really no excuse to leave money on the table. When I had an FSA, I usually had the opposite problem—I wished I could have contributed more money to the FSA.
If you would like to be cautious, simply add up all of your required deductibles for a year and co-pays on any regular medication you take, and simply elect to have that amount in your FSA. Then you will be sure to use it up.
Upcoming Changes in the FSA
Beginning January 1, 2013, the maximum by law that you will be able to contribute to your FSA will be reduced to $2,500. The upcoming year, 2012, will be the last year you can contribute $4,000 to $5,000 maximum to your FSA. If you can find ways to use the money, you may want to maximize your FSA for 2012 both to pay any upcoming medical expenses with tax-free dollars and to maximize the benefit on your tax return for next year.
An FSA is a great financial benefit that too few people take advantage of. Many people are worried about losing their money, but there really is no reason why you would lose your contributions. Either determine the minimum amount of medical expenses you will have out of pocket for the year and only have an FSA for that amount, or make a list of medical items you can use the money for such as orthodontics for your preteen if you end up with leftover money in the FSA at the end of the year.