If you regularly get new glasses, take prescription medication, or go to therapy, then you should consider utilizing an FSA (Flexible Spending Account). These accounts not only help you pay for your essential medical expenses, but they can also reduce your tax bill.
There are a few different types of FSAs, including healthcare, limited purpose, and dependent care. Each type has different contribution limits and qualified expenses that they can be used for.
Here are some factors to consider before choosing an FSA:
What is an FSA?
An FSA is a Flexible Spending Account that allows you to pay for medical and dependent expenses. These accounts can only be established by your employer, and are not available to self-employed individuals.
If offered by your company, you can opt-in during open enrollment and elect how much you would like to contribute during the year. Your contributions are deducted from your paychecks and will not be subject to income or payroll taxes.
How much can you contribute?
Each year, the IRS sets limits for how much you are eligible to contribute to your FSA. For 2022, the contribution limit is $2,850, whether you are an individual or a family. To help alleviate the high costs of daycare, the IRS allows a contribution limit of $5,000 for dependent care FSAs.
FSAs are generally use-it-or-lose-it accounts. Meaning, if you don’t spend all the funds in the account before the year ends, you will typically lose the money. Some employers will allow you to carry over a portion of your funds to the next year. The IRS has set this limit at $570 for 2022.
What can you use them for?
Unlike with HSAs (Health Savings Accounts), most FSAs will not allow you to withdraw funds. Instead, you will need to submit receipts for your qualified medical expenses in order to get reimbursed. These expenses typically include medical copays, deductibles, prescriptions, dental, or vision expenses. You can find a comprehensive list of qualified expenses here.
Dependent care FSAs can be used to pay for certain expenses, including:
- After school daycare
- Babysitting (while you are at work)
- Day camp fees
- Au pair and nanny expenses
Some notable expenses that DO NOT qualify include:
- School tuition
- Babysitting (while you are NOT at work)
- Overnight camp fees
Understanding the pros and cons of Flexible Spending Accounts can help optimize your medical expenses and tax savings. If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.