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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