As any parent with growing kids can attest to, they go to the doctor’s office and dentist’s office a lot. One of the ways you can receive a tax benefit from these expenses is through what is called a Flexible Spending Account or FSA.
An FSA is an employer sponsored benefit and it allows you to voluntarily set aside (contribute) up to $2,600 per year in a special account with your Employer on a pre-tax basis. If you are married, yours spouse can also set aside another $2,600 with their employer. The benefits of an FSA are:
- Contributions are excluded from your gross income
- No employment or federal income taxes are deducted from the contributions
- Withdrawals are tax free as long as they are for qualified medical expenses
If your employer sponsors an FSA, you will usually sign up during your annual medical enrollment period. It is important to properly estimate how much you believe you will spend in medical and dental expenses for the year because you will have to state that during your enrollment.
The total amount you indicate is then divided by the total amount of pay periods (bi-weekly, semimonthly, monthly) and deducted from your paycheck. As you incur medical or dental expenses throughout the year, you submit proof of payment to your employer who will then reimburse you for those expenses from your FSA. If you do not use all the money in your FSA account at the end of your Employer’s Plan year, your Employer may provide you one of two options: A grace period, usually 2 months, to use the money in your FSA. The other option will be to allow you to carry over up to $500 into the next Plan year.
The drawback with the FSA is that any money not used up will be forfeited. That is why it is very important to know what your employer’s plan year is and only put as much money in your FSA as you think you will spend.