Tax Tips
Tax Tip No. 13: Enroll in a Flex Spending Account
Cut next year’s taxes by signing up for a flexible spending account today.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 19, 2007
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Add to you end-of-year to-do list: sign up for your employer’s flexible spending account to pay for next year's childcare and medical bills with pre-tax dollars. You’ll be among a savvy minority. Although flex accounts are a valuable way to stretch dollars, only one-fourth of eligible employees take advantage of them, according to a recent survey by Hewitt Associates.
Salary that goes into these reimbursement plans dodges federal income and social security taxes and, in most states, state income tax, too. Flex-account distributions are tax-free, and the full amount you allocate for the entire year is available immediately.
For example, put the maximum $5,000 into a plan to pay childcare bills that you have to pay anyway, and you would save nearly $2,000 in taxes (assuming a 25% federal bracket, 5% state bracket and 7.65% Social Security tax.) A dependent-care account also can be used to pay for help for an elderly parent or other family member who lives with you.
Although health care expenses are harder to predict, you can save big by paying for your out-of-pocket health care costs with pre-tax dollars. It's particularly important now as more employers are asking their employees to share the burden of rising health insurance expenses by paying higher deductibles and co-pays. Although the law sets no ceilings on contributions to healthcare FSAs, employers often set dollar limits. Use our calculator to find out how much you should put in your flexible spending account.
And now you have an even better reason to fund a FSA. In the past, if you didn’t clean out your account by December 31, your forfeited the balance. But many employers now grant a two-and-a-half-month grace period beyond the traditional deadline. If your company is one of them and your current balance is not enough to pay for an anticipated expense, like new glasses, wait until January when your 2008 contribution will be added to the balance. Then you can cover the full cost with pre-tax dollars.
Reader Comments (2)
Posted by: Adela K at 08/13/2008 06:49:41 PM
I am an independent contractor/ LLC partner. Can I open my own FSA and if so how?
Posted by: Mary Beth Franklin at 08/14/2008 08:45:06 AM
Adele K, this Mary Beth Franklin, author this article. You can take advantage of pre-tax dollars to pay for health care expenses by using a high-deductible health insurance policy and pairing it with a Health Savings Account. In 2008, individuals can contribute up to $2,900 to an HSA (families up to $5,800). Those 55 and older can contribute an additional $900 in 2008. Your contributions are tax deductible, your earnings grow tax-free and the distributions are tax-free as long as you use the money for out-of-pocket medical expenses. And there is no use-it-or-lose-it rule. Unused amounts remain in the account for use in later years.Check out www.hsainsider.com to learn more and find insurers and HSA custodians. Hope this helps you.