My wife and I are always looking for ways that we can improve our family’s bottom line. Whether it’s through finding ways to make more money on the side, finding ways to save on regular monthly expenses or by finding ways to save on our taxes, we’re always on the lookout for ways to save.
The past few years my wife and I have been taking advantage of a flexible spending account (FSA) to help save money on our taxes every year. The accounts are a great way to save, especially if your family has a good number of health care expenses every year that you can reasonably estimate.
The last couple of years we’ve had a number of expected health care expenses that we could plan for, and as such we decided to contribute $3,000 dollars one year, and then $2,000 this year.
Because of our pre-tax contributions to our FSA we’ve been able to save hundreds on our taxes, and you can too. So let’s take an in depth look at these flexible spending accounts and how they work.
Flexible spending accounts are a type of pre-tax health care spending account whereby people can save money on their taxes by paying for eligible medical expenses before taxes are taken out.
FSAs aren’t available at all companies, and for individuals who are self employed the option is not available. For companies that do have a FSA plan, however, there is typically an enrollment period early in the year where you will elect how much you want to contribute to your flexible spending account for the year. Then your employer will setup regular pre-tax deductions from your paycheck to help fund your FSA.
You can’t usually change how much you elect to contribute to your FSA during the year unless you have certain life events happen like having a child, or if your family status or employment status changes.
FSAs are a good way to reduce your tax burden, especially in years where you’re expecting a good number of health care expenses. Just how much your tax burden can be reduced has gone down this year, however, due to changes in how much you can contribute to your FSA.
As of January 1st, 2013 the amount that you can contribute to a FSA has changed due to provisions in the Affordable Care Act passed a couple years ago. Before this year there was no legal limit on the amount you could contribute to an FSA, although most employer’s set their plans with a contribution limit of $5,000.
Due to the new laws that went into effect this year there is now a $2,500 cap on flex spending account contributions.
Why have they capped contributions to FSAs? To help raise revenue to pay for the Affordable Care Act. Capping FSA contributions at $2,500 will lead to an estimated $14.6 billion in added tax revenue over 10 years.
There was quite an uproar when this was announced from families who deal with long term care for disabled or otherwise sick family members that use the FSA accounts on a regular basis to save money on taxes. Not being able to contribute more than $2,500 means hundreds extra paid in taxes for many of those families, including mine.
One provision of the FSA that cause a lot of stress for people near the end of the plan year is the fact that any money you contribute to your FSA must be used up every year or it will be forfeited. The money can’t be rolled over to subsequent plan years like a health savings account. It must be spent every year. Thus the name flexible spending account.
If you don’t use the money up the unused funds are returned to company’s plan and will be used to pay plan costs.
Because of the use it or lose it provision of FSA accounts it’s important to come up with a good estimate of how much you’ll be spending in the plan year on health care. Planning on having a baby that year? Bump up the contributions for that year. Not planning on having many expenses? You may want to contribute a bit less.
Another provision of the FSA that you should be aware of is the FSA Loophole.
When you elect a certain amount for your plan for the year, let’s say $2,500, you can spend that money and be reimbursed by your plan at any time. So if you spend that money and get reimbursed in January, and then leave the company in February, you will have only made contributions to your plan for the month of January. The plan will have a shortfall since your regular deductions would happen all the way through the year. Despite having used up your FSA election for the year, you won’t have to pay back the rest of the year’s paycheck deductions!
How can you use this to your advantage? If you know you’ll be leaving a company soon and you have some health care spending you need that year, elect the full amount for your FSA that year and you’ll only have to pay for the months that you’re still at that job with that FSA plan.
Figuring out how much to elect for your FSA can be extremely tough from year to year. Unless you have a crystal ball, you probably aren’t going to know exactly how much you’ll spend on health care that year.
At our household we’ve typically only elected an amount that we knew we could spend comfortably based on the previous year’s spending so that we wouldn’t lose money at the end of the year.
In the year we had our son, we elected $3,000 and easily spent the whole amount. For 2013 we elected $2,000 ($500 less than the max) because we had no major expenses, but we chose an amount a bit less than we spent the previous year. The result? We’ve been to the doctor more than usual this year, and we’ve already maxed out our spending for the year in April!
While I’m now wishing I had elected the full $2,500, at least we know that we won’t be losing any money this year. In fact by paying for our health care expenses before taxes we’ll be saving almost $680 this year!
How about you? Are you using a flexible spending account? How much do you expect to save on your taxes?