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To learn more about how FSAs work, visit Practical Money Skills for Life, a free personal financial management program run by Visa Inc. You must re-enroll in FSAs each year – amounts don't carry over from year to year.Some employers offer a grace period of up to 2 ½ months after the end of the plan year to incur expenses but that's not mandatory, so review your enrollment materials. Estimate planned expenses carefully because you must forfeit unused account balances.Health care and dependent care account contributions are not interchangeable.Maximum contribution amounts vary by employer, but commonly are $2,000 to $5,000 a year for health care and $5,000 for dependent care FSAs.
Also, many employers now offer prepaid health care cards, which let you draw on your account at the point of service to pay for qualified medical expenses, thereby eliminating the need to pay cash up front and submit reimbursement forms. As you incur eligible expenses, you submit receipts to the plan administrator for reimbursement.
Your FSA contributions are deducted from paychecks throughout the year. Just be aware that you cannot claim the same expenses under both tax breaks. Babysitting by relatives over age 19 who aren't your dependent.įor some lower-income families, using the federal income tax dependent care tax credit is more advantageous than an FSA so crunch the numbers or ask a tax expert which alternative is better for you.Before- and after-school programs for dependents under age 13.Services provided in or outside your home (including babysitter, nursery school or summer day camp) so that you and your spouse can work, look for work, or attend school full-time.Licensed day care or adult care facility fees.Check IRS Publication 502 at for a list of allowable expenses.ĭependent Care FSAs let you use pre-tax dollars to pay for expenses related to care for your children, disabled spouse, parent, or other dependent incapable of self-care, including: Health Care FSAs let you pay for IRS-allowed medical expenses not covered by medical, dental or vision insurance, including deductibles, copayments, orthodontia, glasses and contact lenses, prescriptions, chiropractic, smoking cessation programs and many more. (Use the calculator at to evaluate your situation.) If you contribute $1,000 to the health care FSA and $3,000 for dependent care, your taxable income would be $36,000 – about a $1,000 reduction in federal taxes alone, depending on your marital status, withholding deductions and other factors. Here's how it works: Say you earn $40,000 a year and are in a 25 percent tax bracket. Using an FSA to cover expenses you would have paid for anyway reduces your taxable income by that amount, which in turn lowers your taxes. If your employer offers them, FSAs let you pay for eligible out-of-pocket health care and/or dependent care expenses on a pre-tax basis – that is, before federal, state and Social Security taxes are deducted from your paycheck. That's a big mistake because the money you could save by choosing the right employee benefits package probably far exceeds any savings you could get on a big-screen TV.įor example, many people don't sign up for an extremely valuable benefit – flexible spending accounts (FSAs). Admit it: You probably spend more time comparison shopping online than reviewing your annual benefits enrollment materials.
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