Flexible Spending Accounts Fsas Are An Easy Way To Lower Your Tax Bill

Flexible Spending Accounts Fsas Are An Easy Way To Lower Your Tax Bill



Flexible Spending Accounts FSAs Are An Easy Way to​ Lower Your Tax Bill
A flexible spending Account FSA is​ a​ way for you​ to​ put money aside tax free for important expenses. ​
This can potentially save you​ hundreds of​ dollars in​ taxes. ​
Put simply,​ an employer sets aside part of​ your earnings to​ pay for qualified expenses,​ and​ that process lowers the​ overall tax you​ owe at ​ the​ end of​ the​ year.
There are primarily three types of​ FSA
1. ​
The Health Care FSA also known as​ Medical FSA,​ Medical Expense FSA,​ or​ simply Health FSA,​ where qualified medical expenses are put aside. ​
These can include insurance deductibles,​ copayments,​ and​ coinsurance costs as​ well as​ specific products,​ treatments,​ and​ medications not covered by insurance. ​
Medical issues can be serious,​ or​ as​ simple as​ buying a​ year’s worth of​ bandaids.
2. ​
The dependent care FSA,​ where qualified child care expenses can be put aside. ​
While almost always used for children,​ they can also be used for adult day care for elderly dependents such as​ parents that live with you.
3. ​
The travel FSA,​ where costs of​ public transportation and​ in​ some cases parking can be put aside tax free
Note that funds cannot be transferred between different types of​ FSA if ​ you​ have more than one type,​ even if ​ they are with the​ same company
The math behind the​ savings in​ FSAs is​ easy. ​
if ​ your base salary is​ $40,​000 and​ you​ use a​ Dependent Care FSA for $5000 and​ a​ Health Care FSA for $2000,​ you​ will only be taxed on​ an income of​ $33,​000. ​
Therefore,​ you​ will save the​ following amount your tax bracket,​ or,​ if ​ you​ itemize,​ your effective tax rate x the​ amount you​ put aside. ​
if ​ you​ put aside $7000 and​ your tax bracket is​ 28%,​ your savings is​ $1960. ​
One specific issue you​ should run by a​ tax professional would affect those who have medical expenses over 7.5% of​ their annual income. ​
In that case,​ itemizing the​ deductions may provide better tax savings than the​ FSA. ​
Because there could be other factors that affect your taxes,​ you​ should rely on​ your tax professional or​ any popular tax software to​ assess your exact potential savings.
A new addition to​ the​ FSA market,​ one which makes things much easier,​ smoother,​ and​ paperless,​ is​ the​ FSA Debit Card. ​
These are credit cards that are used to​ pay for any of​ the​ above expenses after you’ve signed up for an FSA account. ​
Currently there are 7 million or​ more debit cards tied to​ an FSA account,​ which involves almost onethird of​ people who have FSAs. ​
By 2010,​ it​ is​ projected this rate will increase to​ 85%. ​
if ​ you​ don’t use a​ debit card you​ will need to​ submit proof of​ payment for qualified expenses,​ such as​ receipts,​ bills,​ and​ statements.
There are two very important restrictions you​ should know about when signing up for an FSA. ​
Most importantly,​ all the​ money put aside must be spent within the​ plan year,​ which is​ usually the​ calendar year but for some companies can be the​ fiscal year. ​
The money left in​ the​ account at ​ the​ end of​ the​ plan year is​ forfeited back to​ the​ company. ​
Second,​ the​ expenses must qualify. ​
a​ description of​ the​ qualifying expenses might vary from company to​ company,​ and​ even if ​ not would be too comprehensive for this article. ​
However,​ they are generally logical and​ fair Dependent care expenses include most day care and​ other childcare provided,​ and​ medical expenses include most products used in​ the​ treatment or​ sometimes prevention of​ a​ medical problem. ​
it​ is​ vital that you​ check out the​ full listing of​ a​ FSA plan’s inclusions,​ exclusions,​ and​ rules before signing up.




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