Flexible Savings Accounts Offer Tax Advantages

The following is a guest post by Alan Kalman.

Keep an eye out for a savings opportunity at work in the form of a Flexible Savings Account  (FSA) for next year. These accounts allow you to set aside funds for medical care and dependent care - and in many cases, the costs of public transportation and parking.

See also: Need Cash for Health Care?

Your contribution is pretax, which means that no federal and generally no state income, Social Security or Medicare tax is owed on what you set aside. This makes the FSA a much better option than taking an itemized deduction for medical expenses on your tax return.

Employers offering medical FSAs usually have an annual open enrollment period in November or December. In 2013, the minimum annual contribution is $240 and the maximum is $2,500 (although your employer may have a smaller maximum). Once you determine your annual contribution amount, your employer will divide that by the number of pay periods per year and withhold that amount from each check.

As you incur eligible medical expenses during the year, you submit them to the plan administrator for reimbursement. Some plans also provide debit cards just for this purpose. The plan covers medical expenses for you, your spouse and eligible dependents.

Depending on where you live and your employer's plan, the plan may also cover a registered domestic partner (RDP) and/or spouse of the same sex - although the tax implications will be different.

It is important to note that FSAs have a use-it or lose-it penalty. If you contribute more than you actually use, the excess contribution is forfeited and kept by the employer.

See  IRS Pub 502 for details on eligible medical expenses (the same as 1040 Schedule A). Most employers give you until March 31 to submit your request for reimbursement for expenses you paid in the previous plan year. Tax law also allows your employer to add a grace period that may extend the plan year to March 15 of the next year. If so, you may request reimbursement for any expense you incur during the 14 ½ month period.

Alan Kalman has a Masters of Science in Taxation from San Jose State University. He currently is an instructor and volunteer with the AARP Foundation Tax-Aide program in Santa Fe, N.M. He owns and maintains the website Tax Resources on the Web as a public service. Through its Tax-Aide program, AARP Foundation provides online tax counseling as a public service, and cannot guarantee the accuracy of the information provided. Your taxes are your responsibility. You are solely responsible for what you do in your own tax situation.

Photo credit: smcgee via Flickr.