Maximize Your Healthcare Dollars with a Flexible Spending Account (FSA)

As a CPA, I often see people miss out on valuable tax savings opportunities. One such opportunity is the Flexible Spending Account (FSA). An FSA allows you to set aside pre-tax dollars from your paycheck to cover eligible healthcare expenses. This can lead to significant savings, especially if you anticipate medical costs throughout the year. Let’s dive into how FSAs work and how they can benefit you.

Key Takeaways

• FSAs offer tax-free savings for qualified medical expenses.
• You can save on federal income tax, Social Security tax, and Medicare tax.
• Contribution limits apply, and funds may be subject to a “use-it-or-lose-it” rule.
• Careful planning and understanding the rules are essential to maximize FSA benefits.

What is a Flexible Spending Account (FSA)?

An FSA is a savings account you can use to pay for eligible healthcare costs. The key benefit is that contributions are made with pre-tax dollars, reducing your taxable income and increasing your take-home pay.

Eligible Expenses

The IRS defines what expenses qualify for FSA reimbursement. These typically include:

• Doctor’s visits
• Prescription medications
• Dental and vision care
• Medical equipment (crutches, eyeglasses, etc.)

Often Overlooked FSA-Eligible Items:

• Sunscreen (SPF 15+)
• First aid supplies
• Contact lens solution
• Menstrual care products
• Breast pumps and supplies
• Blood pressure monitors

How FSAs Work

1. Enrollment: You enroll in an FSA through your employer during your benefits enrollment period.
2. Contribution: You decide how much to contribute annually, up to the IRS limit. This amount is deducted from your paycheck throughout the year.
3. Claims: When you incur an eligible medical expense, you submit a claim to your FSA administrator for reimbursement.
4. Reimbursement: You receive reimbursement for the expense from your FSA funds.

Calculating Your Potential Savings

The amount you save with an FSA depends on your tax bracket and annual contribution. Let’s illustrate with an example:

• Annual FSA Contribution: $2,500
• Combined Federal Income Tax Rate: 24%
• Social Security Tax Rate: 6.2%
• Medicare Tax Rate: 1.45%

Total Tax Rate: 24% + 6.2% + 1.45% = 31.65%

Tax Savings: $2,500 x 31.65% = $791.25

In this scenario, you would save over $790 in taxes by contributing to an FSA.

Remember that your state may also offer tax breaks for FSA contributions, which can further increase your savings. Be sure to check your state’s specific rules.

Potential Tax Savings at Different Income Levels with Varying FSA Contributions

Important Considerations

• Contribution Limits: For 2024, the IRS sets the FSA contribution limit at $3,200.
• “Use-It-or-Lose-It” Rule: Generally, you must use your FSA funds within the plan year. However, your employer may offer a grace period (up to 2.5 months after the plan year ends) to incur expenses or allow you to carry over a limited amount (up to $610 in 2024) to the next plan year. It’s important to note that plans typically offer either a grace period or a carryover, not both.
• Funds Available Upfront: One of the great advantages of an FSA is that the full amount of your elected contribution is available to you at the beginning of the plan year, even though you contribute to it gradually through payroll deductions throughout the year.
• Coordination with HSA: If you have a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA), you may have limited FSA options. In this case, a Limited Purpose FSA (LPFSA) might be a good choice. An LPFSA allows you to use pre-tax funds for eligible dental and vision expenses, even if you can’t contribute to a general FSA due to having an HSA.
• Dependent Care FSA Details:
  • 2024 Contribution Limit:
    • $5,000 (married filing jointly/single)
    • $2,500 (married filing separately)
  • Eligible Dependents:
    • Children under age 13
    • Dependents physically or mentally incapable of self-care
  • Covered Expenses:
    • Daycare
    • Preschool
    • Before/after school care
    • Summer day camps

Over-the-Counter Medications

Previously, you needed a prescription to use your FSA for over-the-counter medications. However, this is no longer the case. Thanks to the CARES Act, you can now use your FSA funds to purchase common OTC medications like pain relievers, allergy medicine, and cold medicine without a doctor’s prescription.

Required Documentation

• Itemized receipts showing: date of service, provider name, service description, and cost
• Submit claims within 30-90 days of the expense (plan-specific)
• Retain records for at least 3 years after filing your tax return

Using Your FSA

Many employers provide FSA debit cards linked directly to your FSA funds. This makes it convenient to pay for eligible expenses at the point of sale. You may also need to submit claims for reimbursement with documentation, such as receipts and explanation of benefits (EOBs) from your insurance company.

FSA Planning Strategies

• Estimate Expenses: Carefully estimate your eligible healthcare expenses for the year to determine your contribution amount.
• Track Spending: Keep track of your FSA spending throughout the year to avoid forfeiting funds.
• Coordinate with Other Plans: If you have other health plans, such as an HSA or HRA, coordinate your FSA usage to optimize your overall healthcare spending.
• Plan for Qualifying Life Events: Understand what qualifies as a life event that allows you to change your FSA contribution amount mid-year, such as marriage, birth, or adoption.

COBRA and Your FSA

• Maximum continuation period typically through the end of the plan year
• Only available if you have a positive FSA balance at termination
• Must be offered as part of your employer’s COBRA coverage. This allows you to continue using your FSA funds for eligible expenses, but you’ll be responsible for paying the full cost of the premiums.

Spouse’s FSAs

Keep in mind that you and your spouse can each contribute to an FSA through your respective employers, potentially doubling your tax-free healthcare savings.

Connecting with XOA TAX

Navigating the world of FSAs and tax-advantaged savings can be complex. At XOA TAX, we can help you understand your options and make informed decisions about your healthcare spending. Contact us today for personalized guidance:

Website: https://www.xoatax.com/

Phone: +1 (714) 594-6986

Email: [email protected]

Contact Page: https://www.xoatax.com/contact-us/

We strongly recommend consulting with a qualified tax professional to discuss your individual circumstances and ensure you make the most of your FSA benefits. For detailed information on FSAs, you can also refer to IRS Publication 969. Remember that FSA rules can vary by state, so it’s essential to seek personalized advice.

Disclaimer: This post is for informational purposes only and does not provide legal, tax, or financial advice. Laws, regulations, and tax rates can change often, and vary significantly by state and locality. This communication is not intended to be a solicitation and XOA TAX does not provide legal advice. Please consult a professional advisor for advice specific to your situation.