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Tax Planning

Flexible Spending Plans Reduce Tax Dollars

Editor's note: This is the transcript of Kiplinger Editorial Director Kevin McCormally's 2007 year-end tax tips series on The Nightly Business Report.

SUSIE GHARIB: As we head toward the end of the year, now is the time to get your 2007 tax preparation started. Here to help this week is our tax guru, Kevin McCormally. He's editorial director at Kiplinger's personal finance. Kevin kicks off our year-end tax tips by looking at how making the most of your flex plan is like money in the bank.

KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Most stories this time of year about flexible spending accounts -- those wonderful workplace fringe benefits that let you pay medical and child-care bills with pre-tax dollars -- focus on the notorious use it or lose it rule. You know, if you fail to spend the money in your account, you forfeit the cash. It's all about getting money out of a flex plan and that is important if you face a December 31 deadline. Fortunately though, an increasing number of firms let employees spend 2007 money as late as March 15, 2008. Be sure you know how your plan works, so you don't accidentally lose money.

What I want to talk about, though, is something much more valuable: putting money into flex accounts. It's sad to say that fewer than one in four employees who have this opportunity takes advantage of it. But this is the time of year firms have open season, that brief window when you choose benefits for next year. If you're about to set the set-aside amount for your flex plan for 2008, be aggressive. Believe it or not, the tax breaks are so powerful, you can afford to forfeit a lot of cash.


Money you steer into a flex account avoids Federal income tax. It dodges state income tax and it dances around the Social Security and Medicare tax, too. So it's easy to save 35 percent or more. That means $1,000 into the account to pay bills you have to pay anyway really costs just $650 or less in reduced take-home pay.

  • Or look at it another way: for every $1,000 you set aside, you could afford to forfeit $350 and still come out ahead. Now, you don't want to forfeit a dime, so be careful when estimating your out-of-pocket expenses for child and medical bills. But don't be paralyzed by the use it or lose it rule. I'm Kevin McCormally.

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