Health Care Flexible Spending Accounts

How Much is Too Much?
Since taxes are our biggest expense, we’re all looking for ways to reduce them. If your employer offers a flexible spending account you can reduce your taxes by setting aside pre-tax dollars from your paycheck for health care use. The question I fight with every year during open enrollment, “How much money should I put into my flexible spending account?”

Is a Flexible Spending Account Worthwhile?
For many of us, flexible spending accounts are the only way to get a tax break for medical expenses since they are only deductible to the extent they exceed 7.5 percent of our adjusted gross income. If you contribute to a flexible spending account it will reduce your adjusted gross income in the eyes of the tax man, which lowers your federal, FICA and, frequently, state taxes.

The current annual maximum contribution allowed by the IRS is $5,000 if you are a single parent or married and filing jointly; $2,500 if you are married and filing separately. (The regulations also allow your employer to cap the maximum contribution amount below the IRS numbers). Of course, your expenses may be lower than these maximum but if you can reduce your taxable income a few thousand each year that’s more money in your pocket.

The Dilemma
Due to current IRS rules you lose any money you contribute in a plan year that is not spent for approved medical expenses by the end of the year. An article by Bankrate.com highlights this is a problem that many people face:

“Studies by benefits specialists regularly show that employees typically forfeit more than $100 each year in flexible medical accounts.”

So we have to weigh the cost savings against the amount we could potentially lose by over contributing. It seems to me the big question becomes, “How sick will I be next year?” A rather absurd question, isn’t it? Obviously, if we could predict the future, we would be rich beyond belief and wouldn’t need to worry about setting up a flexible spending account. Next article I’ll talk about the process I go through to come up with the “magic number” to contribute.

[tags] Taxes, Flexible Spending Account, Health Care [\tags]

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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