Flexible Spending Accounts 101 (FSAs)

Advantages:

• You pay pretax dollars for items you would pay for in any event. To get an idea of what this can mean, consider Jim W. He pays tax in the amount of 40% of his income (28% federal tax bracket, state tax of 4%, plus FICA taxes of say 7.65%). If Jim puts $2,000 into a FSA, he can deduct the entire $2,000. This saves him $800 in taxes.
• In all states except New Jersey, contributions to an FSA dodge the state income tax as well as the federal tax.
• A major advantage of Health Care FSAs is that you get a tax break on medical expenses without having to meet the threshold which the federal tax code requires in order to obtain a tax deduction.  Even then, the deduction is only for expenses in excess of the threshold. The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers. (To learn more, see Medical Expenses.)

Disadvantages:

• You have to guess at next year's medical expenses.

• Money left in an FSA account at the end of the year is forfeited (nless an employer allows up to $500 to be rolled into the next year.) It is up to an employer to extend the deadline up to Mid-March of the following year. (NOTE: An employer can minimize this disadvantage. An employer can distribute what is left in an FSA account to employees if the amount is distributed equally among all participants.)

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