2013 is almost gone. You, and many American taxpayers, may be in danger of leaving some of your hard-earned money on the table and otherwise losing some tax benefits you otherwise deserve and can get quite easily.
Do you still have unused money in your medical flex savings accounts (FSA)? You know, that employee-benefit-cafeteria-plan-account you put money in all year long, but have to use by the end of the calendar year or forfeit the balance back to the insurance company? While FSAs can be great for managing medical expenses and they offer real benefits come tax time they do come with some restrictions. Here are some tips on each plan and some ways to help use the funds you need to use before the end of the year.
About Flexible Spending Accounts or FSAs
An FSA is a non-taxed medical flexible savings account offered through your employer to put money aside to pay for medical related expenses. The plan allows you to contribute up to $2,500 of your annual salary into a special account before any taxes are withheld. It's basically taken out of your taxable wages on your year-end Form W-2 wage and tax statement. Any money you put into the account is not considered taxable wages and you can spend it on medical related expenses. This essentially gives you a "tax deduction" for medical expenses - where typically you would need to meet other IRS limits including itemizing your deductions on schedule A to deduct them. This special benefit provides you with an additional $191 to spend on medical or dental expenses from the tax savings on your Social Security and Medicare taxes alone above and beyond federal and state income taxes. . The additional tax savings depends on your tax bracket and federal and state tax rates but certainly is better than no tax savings at all. However, as with any tax benefit, they are strict rules governing the program.
FSA funds can not earn interest and must be used for qualified medical or dental expenses only. In the past, the FSA had a "use it or lose it requirement." Use it or lose simply means, if you don't spend it within the required time frame, typically by December 31 each year, you lose the money forever. Yep, you can lose a part of your pay if you don't use all the money in your plan before January 1.
Recent Good News
Because it is difficult to determine the amount of out-of-pocket medical expenses you will have each year, the IRS recently decided to allow taxpayers to carry over up to $500 each year into the following calendar year -- so you might be able to carry some of your 2013 funds into 2014. Not only does the new rule allow you to carry over up to $500 in contributions from 2013, you can still contribute the maximum $2,500 in 2014. This is a great help if your medical and dental expenses were lower than you anticipated this year. So, you have a few more months to use that remaining money.
What should you do now to make sure you don't lose your money? First, check with the person in your company who handles the FSA and see if they have adopted the new carry-over rules. Your plan must specifically adopt the new carryover rule. Next, check the balance in your FSA. Then gather all your medical and dental receipts that haven't been submitted for reimbursement and file your claims -- get your money! Finally if your company has not yet adopted the new rule and if you need to spend down your FSA before December 31, consider making your semi-annual dental appointment, check-up appointments, and even eye exams before January 1. In addition, you can replace your glasses or contact lenses and even purchase medical devices such as a walker, orthotics, diabetic testing items, or any other medical equipment necessary for you, your spouse, or your dependents.
No FSA? You May Still Be Able to Deduct Medical Expenses
If you itemize deductions, you can deduct qualified health care expenses. These include:
• Prescription drugs
• Dental care
• Doctor visits, hospital visits
• Lab work and radiology
• 24 cents per mile for miles driven to receive care and fill prescriptions
Note that health insurance premiums can not be paid with FSA funds, but can be included in your itemized deductions. Act now to get your FSA account used up before the first of the year and maybe get a little extra spending money for the holiday season!
People always ask me, "What tax deduction might I have overlooked ?" One of the easiest and best is to make use of your company provided flexible spending account provided your company has one. By putting some money into an FSA you can avoid federal income taxes, state income taxes, social security taxes and Medicare taxes -- all adding up to quite a tax benefit.
Everyone has medical expenses every year -- some taxpayers lesser and some larger and some known and expected and much unknown. With a little planning and some forethought each year you can save taxes by using a FSA -- and the tax benefits will add up fast. If you incur just $1,000 of medical expenses in a year -- for co-pay amounts, eye glasses, other out of pocket costs and if you are in a middle federal and state tax bracket, say 25 percent for federal and 5 percent for state, combined with the Social Security and Medicare savings -- that $1,000 that you would otherwise spend and not get a tax break for, by using an FSA could save you about $370 in taxes.